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Green Harvests...

12/23/2005 12:00 am EST


Neil George

Editor, Profitable Investing

"When investing in the stuff that comes out of the ground, most of us think of petroleum or metals," notes Neil George. "But in the Midwest, the true riches are harvested in the form of grains, beans, cotton, etc." Here are his favorite "green" investment ideas.

"The agriculture business, just like every other successful industry, develops and deploys newer technologies to make their profits not only bigger but more secure year-in and year-out. And this is where the boys in the labs are making it all more possible. By exposing and manipulating nature’s blueprint of cash crops’ biology, they make seeds not only more productive at growing into better-yielding plants, but also better defended against natural adversaries from weather to pests to weeds.

"Labeled ‘genetically modified organisms’ or GMOs, most press reports might make you concerned about messing with Mother Nature. But where it counts is on the farm and in the marketplace. GMOs show their value in the continued expansion in demand by commercial farming operations around the world. For the last nine years, GMO crop acreage has expanded at double-digit average annual rates and continues to expand.

"We start with the companies at the forefront of the engineering of new crops. And at the top of the list is Monsanto (MON NYSE). We bought into the bio-tech crop company back in February 2005. And since last winter, the company has generated a return of more than 30%, and it’s far from done. Monsanto designs and produces GMO seeds, which have specific goals for the farm industry. First, its seeds are engineered to be able to withstand various environmental threats to deliver better and more consistent harvests.

"Second, more and more of the seeds are also being designed to provide direct nutrients for better livestock production including the recent deal with privately held Cargill to produce Lysine-rich feed grain for cattle. The continued adoption and rising demand from farmers inside the US and increasingly around the world is bolstering revenues by an average annual rate during the past two years exceeding 40%. This level of growth, while tempered with the company’s finishing its spin-offs of unrelated past businesses, is worth its market premium of three times rising sales. Buy Monsanto up to 75.

"Next is a peer, UAP Holding Corp. (UAPH NASDAQ). This company is a bit more conservative than Monsanto, having come from privately held beginnings prior to last year’s stock issuance. But it’s right in line to continue to capitalize on the rapidly expanding market for its seeds and related ag chemicals. UAP develops and distributes not only its own products but also operates in conjunction with Monsanto and other favorites of ours to deliver seed and chemicals to more than 2 million farmers in the US alone. Buy a few shares of UAP Holding up to 22 (earning a 3.5 percent dividend along the way), after you’ve invested in Monsanto. 

"To make the whole GMO thing work, it needs more acceptance. And that’s where Archer Daniels Midland (ADM NYSE) and Bunge (BG NYSE) come in. They’ve been working overtime to convince their big customers that the quality and quantity can continue to rise as costs are contained. And as we’ve seen and written, it’s working in spades. Both continue to bolster ever more hefty sales to existing markets for their grain and bean products. And in the case of ADM and to a lesser degree Bunge, biofuels from ethanol to bio-diesel are making for new and expanding market demand for their ag products. Since we began buying ADM back in September 2003, it’s grown a whole lot of green for us—a total return of near 90%, or an average annual gain of more than 33%. ADM remains a core long-haul buy up to 25.25. And for investors already invested in ADM, add Bunge up to 65."

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