Investors: Bite into the corn boom

McCain's main beef, besides the subsidies, is that ethanol produces less energy than the oil and gas used to generate it. And despite his flip-flop, he's largely correct. Not only does the corn refining process use a stunning amount of energy and produce a lot of toxic residue, but the growing corn also happens to demand a lot more fertilizer and pesticides than wheat, cotton and soybeans. It also has the effect of cutting way down on the amount of soybeans available for another key alternative energy source: biodiesel.

When capitalism combines with cronyism and do-goodism, there's no stopping the train, however. Fortune reports that more investment money poured into Iowa in 2006 than into New York, a state with six times the population, and the unemployment rate there is essentially negligible, at less than 3.5%.

The other-end-of-the-bull market

The best way for equity investors to play the corn rush is probably through companies that make fertilizer, seeds and pesticides. Although most are already up a lot over the past year, many are still undervalued and could have a long way to go. The market for fertilizer is pretty constrained right now as farmers need up to 20% more than usual to support the increase of 10 million acres of plantings and environmental issues have cut the amount of phosphate and nitrogen produced.

Corn uses nearly 50% more nitrogen per acre than cotton and 22 times more than the amount needed by soybeans. Corn already accounts for 40% of total U.S. fertilizer demand, so figure that that demand for all that stinky stuff is going to grow exponentially.

You may recall that back in the fall, I recommended several chemical makers focused on the ag biz, such as DuPont (DD, news, msgs), Celanese (CE, news, msgs) and LSB Industries (LXU, news, msgs), and all are up 30% to 50% since. They can still be bought on dips, but you should add some others to your list. On its current dip, buy fertilizer maker CF Industries (CF, news, msgs), which trades at a forward earnings multiple of 14 times despite growing upward of 25% annually; Mosaic (MOS, news, msgs), which trades at forward earnings multiple of 12X despite growth upward of 50%; and European seed and pesticide specialist Syngenta (SYT, news, msgs), which trades at 19 times the coming year's earnings. On dips only, you can also consider red-hot stocks Terra Nitrogen (TNH, news, msgs) and Terra Industries (TRA, news, msgs).

As for stocks whose charts are not quite so extended, consider tractor maker Caterpillar (CAT, news, msgs), which should catch back up to Deere (DE, news, msgs) before too long, and popular rural retailer Tractor Supply (TSCO, news, msgs). And finally, for a microcap with a lot of potential, consider CECO Environmental (CECE, news, msgs), which makes the most popular brand of air filtering equipment for all the new ethanol plants being built. It's trading at 14 times earnings and growing at about an 18% clip.

In summary, corn stalks may be the tech stocks of the next decade. It's probably a bubble -- just like the Internet and real estate -- but it is not close to popping yet. Dig in.

Fine Print

I first wrote about the rising demand for fertilizer stocks back in September 2004 in this column. At the time, Terra Nitrogen, Terra Industries and Potash Corporation of Saskatchewan (POT, news, msgs) were already on the move, but they have since doubled and tripled. . . . To learn more about Terra Nitrogen, which also pays a fat dividend of 6.7%, and Terra Industries, click here. To learn more about Potash, read here. To learn more about CF Industries, look here. To learn more about BASF in Germany, click here and here.

An influential research group released a report on Tuesday critical of the merger between Sirius (SIRI, news, msgs) and XM Satellite Radio (XMSR, news, msgs). Read about it here. In my March 1 column, "Why Sirius is still doomed," I highlighted the risk to the satellite radio stocks in the event that their merger attempt fails. The stocks have been much weaker than the broad market this year, failing to rally even when virtually all other technology and entertainment shares have advanced. I still think SIRI is headed under $3.

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At the time of publication, Jon Markman did not own or control shares of companies mentioned in this column.

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