Friday, May 22, 2009
We are in the camp that believes the economy will show positive numbers by the fourth quarter of this year and that the stock market has seen its bottom. With our view being what it is, what kinds of stocks are attractive to us? What sectors should do well in the scenario that we see unfolding? Let us deal with the sectors first: We believe the leading sectors over the remainder of this year will likely be small caps, consumer cyclicals, techs, financials, and industrials. Of these sectors, the surprise to many may be our inclusion of the industrials. Normally the industrials do better a little later in the business cycle. We think this time will be different and the main reason is that the developing economies of the world are still expanding. China and India both had positive growth in 2008 and will do so again in 2009. The industrials are primarily about automation and the movement and manufacturing of equipment and materials. These are all elements greatly needed in the developing world. We believe a very important stock among the industrials is Deere (DE). Deere has long been a great company, and there are numerous reasons for liking it. However, to us DE is a play on China, India, and other developing nations. Here's the reason. People by the hundreds of thousands are leaving the lands and moving to the cities to take manufacturing and service jobs in the developing world. The peasants from the countryside in China and India must now be fed by a mechanized process. Where once all of these people provided for their own food, now a supply chain of some magnitude is needed to feed them. At the front of that supply chain is the agricultural equipment that produces the food. Today's tractors and other farm equipment are automated and computerized at a level that is simply remarkable. My brother-in-law farms thousands of acres in Southern Indiana. He recently told me that he no longer drives his own tractors. His John Deere GPS drives the field rows and he makes the turns. He says that the yields from his corn crop have risen by 10% just from the precise line the GPS-driven tractor takes. There is less human error and greater efficiency. The chart above shows DE has made a very sharp correction from the ethanol-induced euphoria of 2007. Deere has fallen deep into undervalued territory. While the analysts are estimating lower earnings for both 2009 and 2010 for DE, we believe they are being too pessimistic. If the US economy turns positive later in 2009 and Europe turns up by mid 2010, Deere's earnings should turn higher much sooner than the analysts are now forecasting. With the stock very undervalued and better news on the rebound, we like Deere at these levels. We own Deere. This blog is for information purposes only. Please do not make investment decisions based on this blog.