Not All Companies Are Created Equal and these 3 Prove It

You can learn a lot from looking at an industry's best performers—here are three that bucked the trend in struggling industries last year.

Jan 7, 2014 at 11:33AM

Investing is about information and one of the best ways to learn about an industry is to look at its best performers. This simple tactic can tell you what's working in an industry and what isn't. Last year Alliance Resource Partners (NASDAQ:ARLP), Agrium (NYSE:AGU), and Freeport McMoRan (NYSE:FCX) all outperformed while competitors struggled.

Coal has been suffering for a number of years from both its dirty image and relatively low natural gas prices. And while big industry players like Peabody Energy (NYSE:BTU) suffered steep price declines in 2013, Alliance Resource Partners is set to post another year of record results and its shares were up over 30%.

The key difference at Alliance is that it mines for coal predominantly out of the Illinois coal Basin, or ILB. This is one of the two cheapest coal basins in the United States. However, the key factor here is that utilities have been switching from higher cost Central Appalachian coal to ILB coal. So, while coal has been competing against natural gas for share of the electricity pie, ILB coal has been taking a bigger bite of coal's slice.

The takeaway isn't that you should buy Alliance, though that's not a bad idea. It's that miners with notable ILB exposure are likely to have an edge on competitors. Alliance is a near-pure play ILB miner, but globally diversified Peabody is a big player in that region, too, making it worth a look for contrarian investors.

Potash miners took a big hit in the middle of 2013 when a European sales consortium broke up. Shares of big player Potash Corp. (NYSE:POT) quickly fell, along with the shares of Mosaic (NYSE:MOS). Although competitor Agrium's shares were down about 8% on the year, they barely budged on the same news.

The difference here was diversification. Where Potash and Mosaic are both reliant on the fertilizer market -- including potash, phosphates, and nitrogen -- for their top and bottom lines, Agrium has taken a broader approach in its efforts to help customers get more from their farms. That includes selling seeds, pesticides, and owning a chain of stores selling to the farm market directly. As a result, fertilizers only make up about a quarter of the company's business.

Although a recovery in the fertilizer market will clearly be a bigger benefit to Potash and Mosaic, Agrium might be a safer way to play the industry's long-term trend. Population growth coupled with improving economic standards, particularly in developing markets, will increase the need for food. The best way to meet that need is to use fertilizer. However, the trend should have a broader benefit for the entire agriculture market—Agrium is a way to play both the fertilizer trend and the growth in the broader ag market, as well.

Copper, Gold, and Oil?
The shares of Freeport McMoRan Copper & Gold started to move higher in the middle of 2013 even while the shares of competitors like Southern Copper (NYSE:SCCO) continued to languish. That upturn coincided almost perfectly with the consummation of an oil and natural gas acquisition.

While drilling for oil and gas is very different from mining for copper and gold, the purchase got the company into an industry that's doing relatively well. The drilling segment now makes up about 25% of Freeport's overall business. A broadening footprint was the reason for the upturn and why you might want to keep an eye on Canada's Teck Resources (NYSE:TCK).

Teck recently announced it's moving forward on a plan to mine oil from the Canadian oil sands. Although production won't start for a couple of years, when the oil does start "flowing," it could turn into an important growth engine for the miner. And investors could push Teck shares higher like they did with Freeport.

With a new year just under way, it's a good time to look at what worked in 2013 and try to figure out why. That can give you a read on how to start 2014 out on the right foot. And the divergent performances of Alliance, Agrium, and Freeport hold a huge amount of information that can be used to help direct your investing as January gets under way.  

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Alliance Resource Partners, L.P.. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold and PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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