Are There Any Sectors or Stocks Which Haven’t Done Well in This Rally?

It’s a tough time to be looking for contrarian opportunities.

Almost every sector has done exceptionally well.

Car rental companies have delivered 500%+ returns from their lows. Banks and real estate stocks just go higher and higher. Oil’s inching closer to $80 a barrel. Natural gas has recovered nicely from its summer beating.

Even long-time contrarian standbys like gold and silver stocks have, in many cases, bounced back to their 2008 highs.

The breadth of the rally has been exceptional. The run over the last six months has pushed the S&P 500 P/E ratio from below 15 in March to above 19 (as tracked by Robert Shiller’s inflation adjusted, 10 year average earnings model). Also, the dividend yield for the S&P 500 sits at a low 2.28%. The index’s yield has historically hit 6% or higher at true stock market bottoms.

Basically, the market is overvalued. Frankly, it has been for more than 20 years.

It will change – eventually. That doesn’t mean there’s no opportunity. As in all type of markets, bull or bear, there will always be safety and opportunity in value stocks. The more out of favor the sector or stock, the lower the downside risk and the greater the upside potential.

But here’s the problem. After such a meteoric rise in the markets, are there any true values really left? Are there any sectors or stocks which haven’t done well in this rally?

Well, all I can tell you is there aren’t many. But there is one that, due to an improbable one-time event, has barely joined in this rally at all. Yet still offers plenty of opportunity in the months ahead as well as exceptional opportunity in the next decade. And a few days ago we got the perfect “buy” signal from the markets.

Anything That Can Go Right, Might Go Right

I’m talking about agriculture. We all know the basic story for agriculture. World population is growing. The world is getting richer. And the world is consuming more food.

It’s there, its long term, and everyone knows it. The way the agriculture situation is shaping up, the only way you will not come out ahead is if you sell out too early or don’t have a long enough time frame.

Despite all the obvious long-run upside potential though, agriculture sector stocks have fallen grossly out of favor lately. But it won’t last forever. And there will be a few opportunities to buy in at great prices. Right now is one of those times.

The past year or so has been tough for agriculture for a number of reasons.

First, there was a truly massive agriculture bubble last year. Hedge funds were leveraged to the hilt raking in massive gains on the steady 5% to 10% monthly returns from stocks across the agriculture sector. All the warning signs were there. The bubble was a great ride up and led to an equally great fall when it burst.

Second, the past year’s growing season turned out to be another exceptionally great one. The agriculture growing season could not have started out any worse. South American farms’ harvest was devastated by drought to start off the year. Floods in the leading agriculture-producing states pushed plantings weeks and, in some cases, months behind schedule. And the credit crunch cut into farmers’ risk appetite and they scaled back greatly on fertilizer use.

It was the perfect storm for agriculture. But again, this is farming and there are a lot of other variables. The most unpredictable and most important one is weather. This year the weather turned out perfectly. Farmers needed sun, they got it. They needed a break for rain, they got it.

Anything that could have gone right did go right. The expected disaster was, for one more year, narrowly averted. The US Department of Agriculture officially reported “bumper crops” across many major agriculture commodities like wheat, soybeans, and corn.

But farmers won’t be able to bypass Murphy’s Law like they have been over the past three years forever. An off-year will come. And, quite frankly, it’s due.

That’s why, after the third stellar annual harvest, agriculture stocks are looking as good as they have in years. And right now is looking like a good time to move into them.

The Greatest Buy Signal of All

The old saying, “buy on bad news, sell on good news” has worked out exceptionally during the last bull market. Odds are that if you bought on bad news between 1982 and 2007, the stock would eventually reach a higher point.

Bull markets have a tendency to make almost any strategy look good though. And we’re no longer in a bull market. As a result, the safest and most profitable opportunities will come to those who wait for the really bad news.

The really bad news came for agriculture stocks last week. Although the mainstream financial headlines were focused on gold, banks, and real estate, one of the world’s leading fertilizer stocks quietly sent out a buy signal early last week.

You see, Mosaic (NYSE:MOS), a company which produces the full spectrum of fertilizers, reported its earnings fell 91% when compared to the same quarter last year. The company cited a sharp decline in sales. Mosaic’s top-line revenues fell from $4.32 billion in the same period a year ago to a paltry $1.46 billion this year.

On top of that, Mosaic missed already tragically low expectations Wall Street had for it and other fertilizer companies (see table below for how low the estimates were).

In Mosaic’s case, analysts were expecting earnings of 35 cents per share. The company only posted 23 cents in earnings per share.

Everything that could have gone wrong went wrong for Mosaic. But something odd happened. Shares of Mosaic actually went up.

That’s the “buy” signal. When terrible news comes out or exceptionally poor earnings results and the stock goes up, it’s a clear signal all the sellers who wanted out have gotten out.

It’s Tough to Go Wrong When Everything is Expected to Go Wrong

That’s why there are a lot of reasons to like agriculture – specifically fertilizer stocks – even more so right now.

Sure, we have the long-term fundamentals. There’s Peak Soil, growing world population, ballooning global middle class, etc.

But there’s also another very important reason for a strong year for fertilizer next year which most investors are just catching onto. That’s the impact of this year’s bumper crop. Plants take nutrients out of the ground. The bigger they grow, the more nutrients they use. That’s why after this season’s exceptional crop, farmers will need to use a lot more fertilizer next year to make up for the lost nutrients.

Finally, from a timing perspective, it really is tough to go wrong when expectations are so low. Remember, great expectations tend to produce great disappointments. And the same is true inversely.

So yes, the markets are soaring. Yes, there aren’t very many undervalued sectors out there. Yes, despite the strength and length of this rally, we’re still in a long-run bear market. But, for those willing to find them, there is always some sort of opportunity out there.

By Andrew Mickey

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