Put Some Green In Your Pocket With This “Green” Ag Stock

| February 4, 2010 | 0 Comments

Mention the word “agriculture” around some traders and you’ll get blank stares and a few stifled yawns.  Agriculture stocks just aren’t as sexy as technology or biotech shares.

If you share this point of view, hold on to your hats!  You’re about to gain a whole new perspective.

You see, I’ve found a small Chinese agriculture stock that’s poised for huge gains this year.  But, before I get into the details, I need to give you a little background.

This past Sunday the Chinese government issued their first policy statement for 2010.  It says the government’s key priority is narrowing the development gap between urban and rural areas.  They plan to do this with increased spending and investment incentives for agriculture.

Here’s why.

The Chinese learned an important lesson from the global financial crisis.  They learned having an economy overly dependent on exports makes them very vulnerable to downturns in the global economy.

As a result, the Chinese government is embarking on a major policy shift.

They’re going to transform their export driven economy into an economy balanced among exports, investment, and domestic consumption.  To do this, the government has to focus on developing its emerging consumer class.

In urban areas, incomes have grown rapidly.  A consumer class is already established and growing.  The problem is this urban middle class is only a small part of the population.

The vast majority of China’s population lives in rural areas.  They’re mostly poor farmers who have missed out on China’s growth miracle.  As such, they don’t have any money to spend.

The Chinese government believes the best way to boost domestic spending is to improve incomes for the rural population.  That’s why they’re planning to invest heavily in agriculture this year.

Here’s a few of the specific policies they’re considering:

  • Subsidies to increase the output of grain, potatoes, highland barley, and peanuts.
  • Purchasing and stockpiling of major agricultural products like corn, soybeans, and oilseeds.
  • Developing banks and lending companies in rural areas to spur investment in agriculture.
  • And, increasing investment in irrigation, land reclamation, and soil improvement to build more high-yield farmland.

The last measure really caught my eye… especially the part about improving soil quality to build more high-yield farmland.

I did a little digging and found out China’s farmers face two huge problems.

First, the amount of arable land is shrinking very quickly.  As China’s huge population continues growing, it requires more land to live on.  This leaves less and less land for agriculture.  Second, heavy usage of chemical fertilizers have hardened the soil and reduced its fertility.

If China doesn’t do something about these problems soon, they’ll eventually face a catastrophic situation.  They won’t be able to produce enough food to feed their people.  (Can you imagine what would happen then?)

That brings us back to the small Chinese agriculture stock I told you about earlier.  This amazing company is China Green Agriculture (NYSE: CGA).

They have a solution to both of these problems.

The company makes over 100 different kinds of “green” humic acid based compound fertilizers.  Humic acid is a major constituent of organic matter in fertile soil.

Humic acid provides many agricultural benefits.

It improves soil structure and aeration, nutrient absorption, and water retention.  It reduces soil crusting problems as well as soil erosion.  And, it promotes the development of root systems and seed germination.

The impact on plants and crops is amazing.

Foliage is thicker, greener, and healthier.  Flowers are larger and last longer.  Fruits and vegetables develop greater protein, vitamin, and mineral contents.  And, crop yields increase significantly.

Due to the benefits of humic acid based fertilizers, CGA is seeing strong demand for its products.  And, this strong demand is driving rapid growth at CGA.

Take a look at the company’s 2010 first quarter results.

Revenue jumped 27% to $11.3 million.  Net income soared 50% to $5.2 million.  And, earnings per share of $0.24 beat the consensus estimate by 20%.

What’s more, management raised guidance for fiscal year 2010 ending June 30th.  Analysts are now expecting revenue and earnings growth of 39% and 17% respectively.

Despite the company’s strong growth, the shares are misvalued by the market.  At a recent price of around $14 per share, CGA is trading at just 9.5x the fiscal year 2011 estimate.  And, the company has a meager PEG ratio of 0.41.

Both metrics are very low considering earnings are expected to grow 17% in FY2010 and a whopping 66% in FY2011.

CGA could easily trade up to $25 over the next twelve months.  That’s potential upside of 75% from here.

Take a closer look at CGA for your own portfolio.  Not only is it a terrific “green” investment, it could put some nice green in your pocket.

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Category: Foreign Markets

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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