One of the big stories in the market this year has been the rise of commodities. The Invesco DB Commodity Index Tracking ETF (DBC), which tracks a basket of broad-based commodity futures, is up 28.7% so far this year, compared to the S&P 500’s 11.9% gain over the same period. Commodity prices have been rising due to the global economic recovery and inflationary concerns.
While individual commodities typically rise and fall in cycles, when many rise simultaneously, it is referred to as a commodity supercycle. That appears to be the case now. For instance, crude oil surged above pre-pandemic levels. Grain prices, which hit multi-year lows during the heights of the pandemic, have now risen to multi-year highs driven by solid demand.
Rising prices of commodities have been a boon to agriculture stocks. The VanEck Vectors Agribusiness ETF (MOO), which tracks agriculture stocks, is up over 19% year to date. Commodity prices may have taken a breather in May but have since resumed their upward trajectory, which should benefit stocks such as Archer-Daniels-Midland Company (ADM) and AGCO Corporation (AGCO).
Archer-Daniels-Midland Company (ADM)
ADM is a leading producer of food and beverage ingredients. The company processes oilseeds, corn, wheat, and other agricultural commodities. It also engages in the manufacturing, sale, and distribution of products like natural flavor ingredients and owns an extensive network of logistical assets to store and transport crops around the globe.
The company is benefiting from higher commodity prices, driven by tight overall crop supplies, a recovering foodservice industry, and robust demand out of China. ADM saw strong demand for most of its products in the first quarter, evident by its 26.2% year-over-year sales growth. These conditions are driving near-term results.
The Nutrition segment, which is expected to drive growth long-term, jumped 35.5% year over year. The Health and Wellness segment is also performing well, driven by the demand for fibers and probiotics. ADM has an overall grade of A, which translates into a Strong Buy rating in our POWR Ratings system. The company has a Growth Grade of B. It not only showed growth in the first quarter, but earnings are expected to rise 25% this year.
ADM also has a Value Grade of B as it has low valuation metrics across the board. For instance, its forward P/E is 15.15, and its price-to-sales ratio of 0.55 is well below the industry average. We also provide Momentum, Stability, Sentiment, and Quality grades for ADM, which you can find here. ADM is ranked #2 in the Agriculture industry. You can find other top stocks in this industry by clicking here.
AGCO Corporation (AGCO)
AGCO is the third-largest agricultural equipment manufacturer, behind Deere (DE) and CNH Industrial (CNHI). Under its five top brands, Massey Ferguson, Challenger, Fendt, Valtra, and GSI, AGCO offers a full product line of farm equipment through a vast network of dealers and distributors in 140 countries. The company also provides grain handling systems and livestock management solutions.
The grain markets are improving globally in line with the macroeconomic recovery, which directly benefits AGCO. The company is gaining from increased grain consumption and improving demand for farm equipment. In particular, AGCO sees strong revenue growth through higher retail demand in North and South America.
Rising commodity prices should support this demand through the rest of 2021. Plus, replacement demand for aging fleets of larger equipment should also drive growth this year. AGCO has an overall grade of A, translating into a Strong Buy in our POWR Ratings system. The company has a Growth Grade of A, which isn’t surprising as sales are expected to rise 36.7% year over year this quarter, and earnings are forecasted to soar 102.7%.
AGCO also has a Value Grade of A, driven by low valuation figures. Its EV/EBITDA is 11.8, and price-to-sales ratio of 1.1 are both well below the industry averages. For the rest of AGCO’s grades (Momentum, Stability, Sentiment, and Quality), click here. AGCO is rated #1 in the same industry as ADM (Agriculture).
Note that AGCO is one of the few stocks handpicked by our Chief Value Strategist, David Cohne, currently in the POWR Value portfolio. Learn more here.
ADM shares were trading at $68.87 per share on Monday morning, up $0.10 (+0.15%). Year-to-date, ADM has gained 38.33%, versus a 13.40% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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