Every week, a professional investor tells MoneyWeek where he’d put his money now. This week: Hugh Hendry, manager of CF Eclectica Continental European Fund
We enter 2008 with growing confidence. Strong and persistent relative performance from commodities and commodity-related stocks is ongoing. While others try to buy into dips in broken sectors such as financials, home building and property, at Eclectica we are using the opportunities presented by weak markets to add to positions in commodity shares.
The agricultural sector is virtually unrepresented in the European indices, yet we believe, despite the twists and turns of the global economy, that markets are embracing a historic revaluation of hard assets versus their financial counterparts. Currently, over half of our Continental European fund is invested in European equities related to agriculture.
Yara (Oslo:YAR) and Syngenta (US:SYT) are good examples of firms taking advantage of microtrends within this sector. Yara is the world’s top supplier of mineral fertilisers – what I call the crack cocaine of farming. With predictions of rising prices and global food shortages, increasing the yields from farmland is the fastest way to grow production.
Yara’s strength as a company revolves around three factors. It has pricing power – if it raised its prices, farmers are likely to be willing to pay more for the product. Its revenue is growing at 30% a year. The company also has market share – some 40% of the European market – with few signs of competition. Finally, its stock is underowned; almost no large fund managers invest in it. Once it gains the interest of bigger investors the stock price should rise as a result.
There are around 32 countries that do not generate enough food to feed their people. The most immediate action farmers can take to make more money from their land is to plant superior seeds. Genetically modified (GM) seeds can be compared with a blockbuster pharmaceutical drug. The investment process is long and expensive: it takes over ten years to research, develop and commercialise a GM trait. Success is not guaranteed, but profitability on a successful trait can be astronomic.
Syngenta is on the verge of developing its own proprietary triple-stack seed – seeds with three favourable traits built into them. Bringing this product to market will trigger revenue growth and margin expansion. Even if this seed division were only to re-rate to five times sales, a substantial discount to rival Monsanto, this would imply 50% upside for Syngenta shares from here.
Alstom (Euronext:ALO) also has the potential to outperform in 2008. This French firm is perfectly positioned to take advantage of an Achilles heel in globalisation: the underinvestment in electricity development. Pressure points are building up across the globe in places such as Chile, Argentina and South Africa, where electricity supply routinely falls short of demand.
Alstom suffered heavily in the late 1990s when a fault was discovered in its newly-launched gas turbines and it had to replace them in every location, as well as compensate customers for lost electrical output during a boom in the gas price. However, we view the company as a sleeping giant. Energy prices continue to rise and utility firms are racing to build enough generation to satisfy demand, which has been growing at around 2.5% a year.
Alstom stands to benefit as it is one of only four companies that the world’s utilities entrust to build their turbines. The stock, having almost tripled over the past two years, has massively outperformed. But further strong demand and limited competition should push the stock price even higher.
The stocks Hugh Hendry likes
Stock, 12mth high, 12mth low, Now
Yara, NOK319.50, NOK134.50, NOK291.50
Syngenta, US$57.59, US$34.07, US$57.32
Alstom, e165.90, e84.55, e135.02