Jim Rogers says this commodity is cheap TODAY
- Better than silver and natural gas?
- America's favorite white powder
- 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
