Friday, November 30, 2007

Another overdone resource play?

Charles Dickens, in his A Tale of Two Cities, didn’t know he was describing the stock market when he wrote: “it was the best of times, it was the worst of times.” But he was prescient in his unknown description of investor behavior. We are operating in a market that has no memory! We have returned to a goldilocks economy aided by upcoming Fed rate cuts. Soon we’ll change our minds and concentrate on why the Fed is cutting rates and credit issues.

I mused a couple of days ago that Deere, while an excellent company, looked like it may have gotten way ahead of itself in the latest batch of euphoria. Deere splits its stock on December 3rd and in our present elated state, the stock may run upward in a 1990’s type behavior even though the split doesn’t change any economic value. Besides I found a better candidate to cheer against.

AGCO has run faster than Deere in the last three months. While De is up 30% and CNH Global [Case] is up 25%, AG has climbed 60% in three months and all three were behaving alike on prior charts. It will probably move with DE upward when DE splits. Over the next 6 months I think it is vulnerable.

AG, while not as solid as Deere, is a good company. But selling to farmers hasn’t been terribly steady or lucrative in past history. The good times have been few. Has ethanol in the US and Brazil and a growing middle class worldwide changed agriculture for good? I don’t think so. Would you pay 21X forward earnings, DE trades at 14X, and 14X cashflow for a farm machinery manufacturer? Evidently momentum investors will chase AG as long as it is moving upward. Other ag manufacturers like Valmont haven’t surged in the past three month. At some point AG will come back toward the other stocks.

My thought process is the same as with MLM. A good company in a solid industry that has moved further than it should have. MLM hit $170 and visited $118 within 3 months. It ought to be valued around $100 and it will get there before long. I exited at $120 and the Dickens Christmas gift has pushed it up to near $130, so I’ll start that process over again. AGCO is a very similar situation. The company isn’t going broke, it is just going to go down . I can’t ever pick when and the carrying costs can become expensive, but agricultural earnings won’t grow at 20% forever and forecasts won’t always be rosy. When the momentum buyers become dissatisfied they leave in a hurry and hopefully I will have made a few dollars to make up for poker, golf, a new remote control boat cover/lift.

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