While investors and pundits debate the impact of ethanol on our long-term energy problems, one thing is clear according to Ivan Martchev -- the popularity of ethanol is having a "huge impact" on agribusinesses.
The editor of Vital Resource Investor explains, "Whether ethanol makes economic sense is less irrelevant. It is having an effect on farming." Indeed, he believes one of the best ways for investors to play the popularity of ethanol is to focus on farming equipment.
Within this market, he notes that the obvious choice for investors is industry leader Deere & Co. (NYSE: DE). However, he cautions that the stock already reflects investor optimism.
In addition, he notes, "The stock recently traded at $114, and many individual investors dislike buying triple-digit stocks." Therefore, he notes, he looked for a "worthy adversary to Deere" and found Case New Holland, whose name was recently shortened to CNH Global NV (NYSE: CNH).
The advisor calls CNH a restructuring story. He notes that the company is majority owned by Fiat, which is itself recovering from a "dire situation" two years ago.
He notes, "CNH is just getting back to normal after its restructuring, and there's still room for the stock to move. The company is seeing rising gross margins (from 16.5% to 18.5%), rising profitability and rising revenues of late."
He also points out that the stock trades at a premium to Deere's earnings multiple at 25 times earnings and at a discount to Deere's price to sales multiple at 0.79 of sales."
In other words, he admits, the company is not as profitable as its better known competitor. But, he adds, the stock of CNH Global has been outperforming "big time." The driver behind the recovery, he observes, is the interest from farmers in higher powered equipments, which have higher margins.
He explains, "The stock would greatly benefit if Fiat sells some more shares into the market or spins it off to its shareholders. But for the time being, trading volumes are large enough to attract institutional interest. In the meantime, we are seeing a definite improvement in operational performance." He rates the stock a buy.
For more stock picks from the leading financial newsletter advisors, visit Steven Halpern's free daily website, TheStockAdvisors.com.
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