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Better than silver and natural
gas? - America‘s favorite white powder
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A company selling for LESS than
earnings
For months, former George Soros partner and famed
resource investor Jim Rogers has been trumpeting natural gas and silver
investments. I’ve been doing the same in the Resource
Prospector newsletter since launching back in March. If
you’ve been sitting on the sidelines, there is still time to take action
before these investments run away from you.
Jim Rogerswrote
the book on resource investing: Hot
Commodities. I urge anyone interested in the topic to go
out and get yourself a copy. Right now there are 29 new and 17 used
copies of this book on
Amazon.
When Jim Rogers said to buy natural gas and silver three
months ago, I was already urging you to do the same. Natural gas prices
have since risen by more than 25% – and some of the stocks in that sector
have done far better.
I’ve also been pounding the silver drum. Silver is now
up almost 10%, but I still think there’s much more upside. You can read
more about silver’s potential in this past issue of the
Resource Prospector by
clicking here.
Rogers is still bullish on
silver, but he recently mentioned another cheap commodity. It’s something
that Americans use everyday in great quantities – over 160 pounds per
person every year.
I’mtalking
about sugar. Prices for the white powder fell 40% between April and the
first week in June – but they’re on the rebound.
It’s the perfect time to build a position in this
commodity, and there are so few publicly traded companies that focus
entirely on sugar, that it’s an easy choice.
The set-it and forget-it sugar investment is the iPath
DJ-UBS Sugar TR Sub-Index Exchange Traded Note (NYSE:
SGG). According to their prospectus, this investment is
“intended to reflect the returns that are potentially available
through an unleveraged investment in sugar futures
contracts.”
As you might be aware, I am leery of exchange traded
securities that seek to track prices of futures contracts. As I noted
in
my article about the United States Natural Gas ETF (NYSE:
UNG), these funds can serve up losses to their investors even if
the underlying commodity is making gains.
But this fund hasn’t performed all that badly – probably
because the storage costs for sugar are much lower than the storage costs
for natural gas. High storage costs make it difficult if not impossible
to make money by continually rolling over new futures contracts – which
lose value as they approach their delivery date.
In any event, this fund appears to do a fine job of
tracking the underlying price of the commodity.
I’ve plotted SGG against the sub-index it tracks, and
you can see how they’re in nearly perfect lockstep:
I’d look to pick up some units of this fund under $50 –
but I don’t think it’s the best way to play the trend.
My favorite way to play rising sugar prices is to buy
the one of the oldest sugar refiners and producers in the stock market:
Imperial Sugar (Nasdaq: IPSU).
Thiscompany
currently sells for less than earnings – with a
PE of 0.99. I’ll say it again: they earn over $11 per share, and they’re
selling for under $11 a share.
That’s not a situation that comes around very often.
Sugar companies typically sell for more than 17 times earnings, so it’s
truly in bargain territory. This company also pays a small
dividend.
Okay, so the company is selling for less than earnings
for a reason. They had an explosion at one of their refineries, and they
still haven’t been able to get back to normal levels of production. They
also took a loss on some hedging activity.
That isn’t good news for people who bought this company
last year – but it’s great news for people buying today. There’s lots of
negative sentiment about this company. Analysts expect IPSU to lose money
next year. If prices stay the same, I’d probably agree with them. A big
reason for the precipitous price drop is due to Brazilian sugar output,
which for 2010-2011 is expected to be 20% higher than last year.
On the face of it, that’s bad news for IPSU. It means
sustained lower sugar prices. But I believe that analysts are overlooking
how oil factors into the equation.
Brazil currently produces more
ethanol than any other country besides the United States, and they’re the
world’s biggest ethanol exporter.
I’m bullish on oil over the next 18 months, which means
I believe that Brazil will increase ethanol production, which puts
pressure on sugar supply. The more expensive oil gets, the more
profitable it becomes to turn sugar into ethanol, rather than loose it
into the world sugar supply.
We saw this scenario play out three years ago, when oil
prices surged in the summer of 2007. Sugar prices skyrocketed from just
over $8 per unit to over $29 a unit less than 18 months later. Sustained
oil prices under $100 a barrel has made it less lucrative to produce
ethanol – but $100 oil is just around the corner – so I believe sugar
prices will follow in those footsteps again.
Over the past two months, IPSU has bounced off of lows
of $9.50 as a point of support – that’s during a time when prices were
dropping like crazy, and the company released bad news about their
refinery. The company shows real strength at the $9.50 price.
Shares currently sell for just under $11, but with a
continued rise in sugar prices, I expect this company to sell closer to
the $15 range. The market doesn’t seem like it will let this company dip
below $9.50 – even with bad news and falling sugar prices.
I don’t think we’ll see $9.50 shares anytime soon, but
if we do, that would be a great entry point. My recommendation would be
to nibble at shares under $12, and to take bigger bites under
$10.50.
If you think, as Jim Rogers and I do, that sugar prices
are only going higher, then you should think about buying some shares of
IPSU.
Good investing,
Kevin McElroy
Editor
Resource Prospector