After last week's market chaos, many of my colleagues are posting articles about which suddenly cheap stocks they're buying. My picks in agriculture actually went up last week, but they're still cheap and deserve looking at.
My top pick in equipment manufacturing is Lindsay Corp.
On the surface, Lindsay looks overvalued compared to Valmont. Both stocks have fallen about the same amount recently, and Lindsay's stock actually went up last week. Lindsay sports a rich P/E close to 20, while Valmont is a bit lower at 18.
But Lindsay has been growing rapidly over the past five years, while Valmont has barely budged. Revenue at Lindsay has outgrown Valmont by a small margin, but operating income has blown Valmont out of the water, at 47% annually compared to Valmont's modest 17%. Lindsay has aggressively raised margins from 3.1% in 2005 to 10.6% in 2010, while also bringing down capital expenditures as a percentage of gross income. This has led to 19% annual free cash flow growth, while Valmont has only managed 3.5%.
Despite its slightly higher valuation, Lindsay's rapid growth earns it a much lower PEG ratio, which measures price-to-earnings growth. The stock's resilience in the last week makes it an attractive holding if things get worse, but the shares are still on sale, having fallen close to 20% in the last month, despite a blowout recent third-quarter report.
Regular readers know I am bullish on fertilizer stocks. Continuing bad weather over the past year in essentially every major growing area has kept global supplies of key crops low, while strong demand from emerging economies has kept up the pressure on farmers to raise yields. Global stocks-to-use ratios on key crops are near record lows, so supplies will need to be rebuilt even if a new recession hurts demand, and crop prices are near record highs, further incentivizing farmers to plant as much as they can while the going is good.
Within this area, CF Industries
As a result, CF's capital expenditures as a percentage of gross income are, on average, about a third of that of PotashCorp
Both companies saw their stocks rise this past week, but CF still has a low P/E ratio and Terra's recently announced dividend carries an annual yield of almost 9%. Despite large gains since I first recommended both stocks in June, I continue to think they are cheap and worth buying.
Retail is a tricky beast. Unless it's an Apple Store, most retailers aren't exactly recession-proof, and within agriculture, it's hard to find a retailer that isn't heavily exposed to housing and construction.
And yet, since the recession began in late 2007, two agriculture retailers have been earning money hand over fist. Lowe's
The Foolish bottom line
Agriculture stocks have fared extremely well in this sudden downturn, and the businesses have been strong throughout the recession, but amazingly, most of them are still sporting low valuations and should hold up well if the economy gets worse. Scooping some of them up today should provide a great hedge against further economic weakness.
Fool contributor Jacob Roche owns shares of Terra Nitrogen. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. Motley Fool newsletter services have recommended buying shares of Lowe's Cos. Motley Fool newsletter services have recommended writing covered calls in Lowe's. 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.