One of the big stories in the market this year has been the rise of raw materials. the Invesco DB Commodity Index ETF (NYSEARCA:DBC), which tracks a basket of large-scale commodity futures, is up 28.4% year-to-date, compared to S&P 500 12% gain over the same period. Commodity prices have increased due to the global economic recovery and inflationary concerns. And it drew attention to agricultural stocks.
While individual commodities generally rise and fall in cycles, when many increase simultaneously, it is referred to as a commodity supercycle. It seems to be the case now. For example, crude oil has exceeded pre-pandemic levels. Cereal prices, which hit multi-year lows during the height of the pandemic, have now reached multi-year highs thanks to strong demand.
Rising commodity prices have been a boon for agricultural stocks. the ETF on VanEck agrifood vectors (NYSEARCA:GROWING), which tracks agricultural inventories, is up more than 19% since the start of the year. Commodity prices may have paused in May, but have since resumed their bullish trajectory, which should benefit stocks such as Archer-Daniels-Midland Company (NYSE:SMA) and AGCO Company (NYSE:AGCO).
Agricultural stocks: Archer-Daniels-Midland Company (ADM)
ADM is a leading producer of food and beverage ingredients. The company processes oilseeds, corn, wheat and other agricultural products. It is also engaged in the manufacture, sale and distribution of products such as natural flavoring ingredients and has an extensive network of logistics assets to store and transport crops around the world.
The company is benefiting from rising commodity prices, driven by tight overall agricultural supplies, a recovery in the restaurant industry and strong demand from China. ADM saw strong demand for most of its products in the first quarter, as evidenced by its sales growth of 26.2% year-over-year. These conditions lead to short term results.
The Nutrition segment, which is expected to drive long-term growth, jumped 35.5% year-over-year. The Health and Wellness segment is also doing well, driven by demand for fiber and probiotics. ADM has an overall rating of A, which translates into a strong purchase rating in our POWR odds system. The company has a growth rating of B. It not only showed growth in the first quarter, but profits are expected to rise 25% this year.
ADM also has a value rating of B as it has low valuation metrics across the board. For example, its forward P / E is 15.15 and its price / sell ratio of 0.55 is well below the industry average. We also provide Momentum, Stability, Feeling, and Quality Notes for ADM, which you can find here. ADM is ranked # 2 in the agricultural industry. You can find other top stocks in this industry by click here.
AGCO Corporation (AGCO)
AGCO is the third largest manufacturer of agricultural equipment, behind Deere (NYSE:OF) and CNH Industrial (NYSE:CNHI). Under its five largest brands – Massey Ferguson, Challenger, Fendt, Valtra and GSI – AGCO offers a full range of agricultural products through an extensive network of dealers and distributors in 140 countries. The company also provides grain handling systems and livestock management solutions.
Cereal markets are generally improving in line with the macroeconomic recovery, which directly benefits AGCO. The company benefits from increased grain consumption and improved demand for agricultural equipment. In particular, AGCO is experiencing strong revenue growth driven by higher retail demand in North and South America.
Rising commodity prices are expected to support this demand through 2021. Additionally, replacement demand for aging fleets of larger equipment is also expected to drive growth this year. AGCO has an overall rating of A which translates into a strong buy in our POWR rating system. The company has a growth rating of A, which is not surprising as sales are expected to grow 36.7% year-over-year this quarter, and profits are expected to soar 102.7% .
AGCO also has a value rating of A, due to the low valuation values. Its EV / EBITDA is 11.8 and its price-to-sales ratio of 1.1 is well below industry averages. For the rest of AGCO’s ratings (Momentum, Stability, Sentiment and Quality), Click here. AGCO is ranked No. 1 in the same sector as ADM (Agriculture).
At the time of publication, David Cohne did not hold (directly or indirectly) any position in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services firms, hedge funds and online publications. David enjoys researching and writing about stocks and markets. It takes a fundamental quantitative approach in evaluating stocks for readers.
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