Top 3 Best Agriculture Stocks to Buy Now? (2019 Review)
Today’s article provides a glimpse of the best agriculture stocks in the stock market.
Agriculture stocks don’t get a lot of media attention because they are boring companies that do boring things. They aren’t sexy. However, as legendary investor Peter Lynch has said, boring companies are also where great values can be found.
However, agriculture stocks are critical to both the stock market and basic human existence. There is no civilization without agriculture. We need water, sunlight, and land to survive because we need food to eat!
So while agriculture may not be as sexy as stocks that get all the attention, they fit my bill as being necessary for a long term portfolio. As an investor, you want stocks that traffic in products that are human necessities. We don’t need Netflix to survive, but we need our veggies.
Therefore, keeping an eye out for the top performing agriculture stocks should be high on your investing priorities list. Not only are agricultural products necessary for humans, but because food products get consumed, they offer unlimited potential for repeat purchases.
There are also several challenges facing food creation and consumption, so the agriculture stocks will be spearheading research in areas designed to address these challenges.
The global population continues to grow at a 1% annual rate. Protein continues to supplant carbohydrates in “healthy living” choices. Over the past four decades, arable land has been cut by a third.
That means companies will need to generate higher efficiencies in both food-supply chains and crop yields.
The Best Agriculture Stocks For 2019
If you’re in a hurry, below are our picks for the most valuable agriculture stocks as of this writing.
- The Scotts Miracle-Gro Company: Diversified agricultural play with strong growth.
- Archer Daniels Midland: Massive legacy winner with solid diversification.
- Tyson Foods: Leader in consumable meats.
Keep reading and you’ll learn more about each of these winning agriculture stocks and my thoughts on each.
What Are Agriculture Stocks?
There are basically two categories of agriculture stocks: input providers and food producers/processors.
Input providers means seeds and fertilizers, as well as necessary chemicals like pesticides. These don’t sound exciting, and ignorant people shy away from chemicals, but without these chemicals, we get lousy crops.
There is a major downside to these investments, though. They are essentially commodities, even though they aren’t officially named as such. Their demand will rise and fall in cycles.
However, these items carry advantages that true commodities do not enjoy, such as patent protection. Thus, nitrogen fertilizer or potash have pricing control built in.
The food processors and providers are exactly what their name implies. These are companies that raise cattle, poultry and pigs to be slaughtered and converted into beef, poultry and pork for worldwide consumption.
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How Do You Determine What Qualifies As The Best Agriculture Stocks?
The best performing agriculture stocks has at least two of these three characteristics:
- High EBITDA margins
- High-single-digit or higher earnings growth
- Regular dividend
High EBITDA margins
What is EBITDA? That’s an acronym for “earnings before interest, taxes, depreciation and amortization”. It’s really just a fancy term for operating cash flow, because it takes a company’s earnings, and adds back non-cash deductions and interest paid on debt so investors can get a sense of how much cash flow the business itself really makes.
“High margins” means a relatively high ratio of cash flow to total revenue. The higher that ratio, the more efficient the business is at generating cash flow.
For this industry, I like to see EBITDA margins of 5% or higher.
High-single-digit earnings growth
Peter Lynch refers to companies that have settled into a mature growth phase as “stalwarts”. He likes these stocks because they generate 7-10% annual, and reliable, earnings growth.
That means the company is enjoying stability, and has become a reliable stock, particularly for conservative and retired investors. That stability infers that the company is providing goods and/or services that have achieved a certain degree of brand loyalty and reliability.
The top agriculture companies don’t simply pump out cash to keep the business growing. The strongest agriculture stocks also generate enough cash so that investors are paid a little rewards for taking the risk of investing in solid agriculture stocks.
Thus, companies that pay regular dividends to shareholders also enjoy heightened visibility to long-term income investors and retired investors, who need these regular dividends to bolster their income after they stop working.
Here’s a video that provides some additional information on investing in agriculture stocks.
The Scotts Miracle-Gro Company
What is it?
The Scotts Miracle-Gro Company has been around for 150 years and manufactures, markets, and sells consumer lawn and garden products. It is best known for its lawn care products, including fertilizers, grass seed, and pest control products.
You will likely recognize the most famous of its product names: Turf Builder, PatchMaster, Scotts OxiCleanTM3, Miracle-Gro, Ortho, Nature Scape, Miracle-Gro Organic Choice, Nature’s Care, Agrolux, Roundup, and Groundclear.
What makes it a good stock?
If you mention the name of Scotts Miracle-Gro, chances are whomever you mention it to will recognize the name for the company’s fertilizer. Just as with companies like WD-40, the downside to naming a company after a flagship product is that its stock only gets known for that flagship product.
Fortunately, Scotts has not only diversified its product line and become a go-to player as far as the best-in-class agriculture stocks, it is moving into a hot new arena:cannabis.
Hawthorne Gardening Company is name for the cannabis division that Scotts has created. After all, if a company excels in making things grow, why not marijuana, which is enjoying increasing legalization?
I view this as a long-term upside, but in the near-term, SMG stock can get battered if Hawthorne stumbles in its execution. That actually did occur in the most recent quarter.
Meanwhile, Scotts has all the qualities I look for in the top agriculture stocks.
Analysts project 5-year annualized growth of 9% for earnings. It has an 18% EBITDA margin, far exceeding the 5% I like to see. It also pays a very generous 2.95% yield, and does so by only paying out about 50% of its net free cash flow.
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Archer Daniels Midland
What is it?
Archer Daniels Midland is one of the premier agriculture stocks that handle processing of just about every kind of food. Here’s just a sampling: corn, wheat, milo, oats, rice, barley, sweeteners, starch, syrup, glucose, amino acids, vegetable oil, citric acids, natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber….and the list goes on and on.
What makes it a good stock?
Remember what I said about a stable company that pays dividends? This month Archer Daniels Midland will pay its 348th consecutive dividend – that’s 87 straight years of delivering returns to shareholders.
Archer Daniels Midland hits the sweet spot in top-level agriculture stocks because it has a solid business foundation upon which it builds additional layers of income.
Take corn, for example. The company has first-level corn processing infrastructure, and uses it to create sweeteners, alcohol, and ethanol for fuel. That’s operational efficiency, and that’s one reason why it has EBITDA marginsof 12.5%.
The company has spent a lot of money to improve that efficiency so earnings growth has stagnated thanks to these higher expenses, but that’s about to change.
It also pays a reliable 2.96% yield.
What is it?
You likely recognize Tyson’s name as a leader in chicken. However, it also offers food consumables that include beef, pork, and other prepared foods. Some of its more famous brands include Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells, ibp, State Fair, Gallo Salame, and Golden Island.
The 80-year old company also sells its products to grocery retailers, wholesalers, mat distributors, military commissaries, chain restaurants, live markets, international export companies, convenience stores, hospitals, and other vendors.
What makes it a good stock?
Despite some recent weakness and the CEO’s resignation, Tyson is on a long-term growth trajectory. The near-term problems are the result of tariffs that are harming higher prices, thanks to the trade war with China. China hit the U.S. with a 25% pork tariff on imports.
There have also been rising commodity prices, which is part-and-parcel of this industry. Tyson has hedges in place, but isn’t immune from all such increases.
Nevertheless, Tyson is in first place to benefit from the global move towards higher protein consumption.
Analysts only see about 4% annualized growth in the near-term. However, Tyson remains one of the top agriculture stocks because of its 5% EBITDA margins, and 2.55% dividend yield.
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