Three commodities are foundational to human life: food, energy, and water. And they are closely interlinked. A major shortage in any one of them would deal an indelible blow to world growth, indeed to civilization itself, asserts Stephen Leeb, global investing expert and editor of The Complete Investor.
Unfortunately for the world, there’s good reason to fear that without focused action, shortages, starting with energy, aren’t that far off. That is making it ever more critical to harness technology in ways that make it possible to produce and use these commodities more efficiently.
Three current recommendations in our model Growth Portfolio are leaders in doing just that: Deere (DE) for food, Schlumberger (SLB) for energy, and Xylem (XYL) for water.
Deere, the world’s largest farm equipment company, does a lot more than simply manufacture its iconic big tractors. Spending more than 6% of revenues on R&D, it’s the leader in a range of technologies that span agriculture along with the company’s growing infrastructure and forestry businesses.
Some of its R&D has focused on making sure that all Deere machines work together, that data is automated, and that farm managers can constantly monitor every aspect of a farm’s entire operation. Future technologies will include greater precision in irrigation and pesticides.
Deere gets high marks for deftly navigating one of the worst farm recessions in recent history. It’s the leader in one of the world’s most important long-term markets yet is valued well below the market. Deere remains a strong recommendation.
Schlumberger by a wide measure is the world’s leading oil service company. And while oil is not the energy of the future, it is an energy critically needed to get us to the future.
So why have oil service stocks been slammed over the past couple of years? And why are we confident they will come roaring back? Between 2014 and 2017, capital expenditures in the oil patch declined by more than 40%.
Today, however, with OPEC at full capacity and shale going full throttle, and with oil demand growing steadily since mid decade, there’s almost no excess capacity. Even with the current trade war, demand should continue to advance.
The bottom line is that the world needs massive investment in oil projects. Schlumberger estimates the oil industry needs to make up half a trillion dollars in capital investment. And that translates into five or more years of growing demand for oil services, with Schlumberger far and away the biggest and the best provider.
Xylem has three divisions that in various ways help its customers use water more efficiently. Its infrastructure division manufactures water and wastewater pumps and water treatment equipment.
Its applied water division makes the basic valves and pump dispensing systems used to deliver water to both commercial and residential markets.
Its measurement and control solutions segment provides a large variety of testing equipment, software, and data analysis to industries like mining, where minimizing water usage is vital.
The company estimates its addressable market is about half a trillion dollars. Its current revenue base is just 1% of that, leaving enormous room for growth. But already, in terms of most metrics, it is the largest full-cycle — collection to distribution — water company in the world.
In other words, like Deere and Schlumberger, Xylem plays a critical role in a critical industry. The company has a worldwide presence. Though the developed world currently accounts for the lion’s share of revenues (a little below 75%), the developing world has been the fastest growing contributor.
Xylem has the leading share in many markets in large economies including the U.S. — where water infrastructure is deplorable and water needs are increasing — and China. That suggests Xylem has found a formula and market that should generate many years of very strong growth.
