Trader ideas for a bear market: honor your stops on existing longs, be selective on any long side po...
02/17/2006 12:00 am EST
"I've been growing very bullish on the grains complex over the last few months, waiting for a significant bottom to develop," says Eric Roseman, editor ofCommodity Trend Alert. "I think it's fair to say that we've officially bottomed." Here's his Canadian play on grains.
"The CRB Grains Index has been the only losing constituent among the commodity sub-sectors since September 2005. If a rising tide lifts all boats in a bull market, then I have no doubt that the tide is now turning for the grains complex. A lethal combination of brutally cold weather in Russia is destroying crops coupled by tightening inventories in the United States and Canada. Year-over-year, the grains have rallied just under 10% and were the best-performing commodities last week.
"In the past, I'd play this trade with commodity futures options. Since 2001, we've had some incredible gains and losses trading futures options and quite frankly, we've done amazingly better picking stocks. That's why I'm plugging a play on soft agricultural commodities for your portfolio—a publicly traded stock with superb technical break-outs on the charts.
"If you want to play the undervalued grains complex, you won't a find a pure investment in the stock market reflecting a diversified strategy in this area; rather, you have to buy peripheral companies that derive most of their earnings from selling and marketing wheat, soybeans, coffee and sugar, for example. That's how we're playing this theme now.
"Agricore United LV(CA:AU.LV Toronto) is Canada's leading farmer-directed agri-business. It is the top supplier of crop nutrition and crop protection products in Canada, and is one of the country's largest grain-handling and marketing businesses. It's also the only North American publicly traded grain-handler to make any money over the last 12 months. It was created in late 2001 by the merger of Agricore and United Grain Growers. Based in Winnipeg, Manitoba, it provides fully integrated grain, oilseeds, and special crops marketing and handling services through a Prairie-wide network of elevators and specialized processing plants.
"What appeals to me about this small-cap company is the turnaround in earnings since 2005; rising prices for corn, wheat, oats, soybeans, and barley over the last six months, and a very powerful stock chart showing a major break-out in January. It's also one of the very few avenues available to trade the grains complex without delving into high-risk call options. And unlike the rest of the market in Toronto, which has surged over the last two years, these stocks are selling for next to nothing.
"Here's the bullish menu for ‘The Breakfast of Champions’: Agricore United LV looks very good for several key reasons, namely rising demand from Asia and declining supplies. Like I've always said, prices for a commodity will boom if supplies are deficient and demand is rising:
- Massive upside trading volume since mid-January;
- Huge break-out off the 4th quarter low on rising volume;
- Big 380 degree turn as earnings turn positive;
- Rising wheat-crop damage in Russia and Ukraine due to severe cold;
- Winter-kill in Europe and drought in the United States has wheat poised to head higher along with sister staples oats, barley, and soybeans;
- One of only several stocks available to play the grains complex;
- An investment in the booming Canadian dollar, which I believe is heading close to par or greater than par, vs. the American dollar before 2008;
- Low stock price relative to energy and industrial metal stocks.
"To be sure, this is not a pure play on wheat or any of the grains. But Agricore United is one of the only tickets out there to tap into this theme. The company will earn more— much more, in a bull market. It's time to diversify our portfolio and spread the risk and hopefully, future profits, into a mega-trade with big potential from a distressed commodity complex. Buy market up to C$9.00. The stock does not trade in the US, so please buy the issue on the Toronto Stock Exchange in Canadian dollars."
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