From Arab states falling to Twitter revolutions, to U.S. states finally owning up to their own fiscal shortfalls, to natural disasters in New Zealand, Australia and now Japan, stock markets around the world have been swinging up and down in manic runs from hope to despair.
And one other thing is true: The markets hate uncertainty. That means, in our current circumstances, smart investors are looking for real assets — tangible commodities and resources that the world has to have to survive or hedge against uncertainty. In 2010, I picked silver miner Silver Wheaton (NYSE: SLW) as my top stock for the year. It doesn’t get much more tangible than silver, and with the metal’s run higher, the stock was up more than 150%.
This year, I’ve found a couple more standouts in the real asset sector.
This duo is a real asset play on the same megatrend that’s been building since the dawn of man: The world’s need for food…
Best Cheap Stocks For 2011: Agricultural demand is growing
China, for instance, has a lot of mouths to feed — 1.3 billion at last count, or 15-20% of the world’s population. Unfortunately, it only has 7% of the planet’s arable land (and most of that is relatively unproductive).On a per-capita basis, China has just a fraction of the available farmland as most other countries. And the gap is getting wider. Population is growing by around 10 million per year, while millions of acres of prime agricultural land are lost to soil erosion, urban construction, and heavy metals pollution.
This dire situation presents ongoing challenges for farmers — but unique opportunities for companies whose products can boost crop yields.
That’s where Yongye (Nasdaq: YONG) comes in. The firm is an emerging leader in the “green” agriculture movement, specializing in organic crop nutrients and animal feed supplements. The company has several advantages over the competition.
First, its chief marketing officer literally wrote the book on reaching out to rural farmers.
Second, its Shengmingsu brand’s liquid nutrient has proven to increase output by 22% and reduce harvest time by up to two weeks.
Finally, Yongye has been negotiating with independently owned supply stores to prominently display (and push) the Shengmingsu brand. The company has a year-end goal of 30,000 stores selling its product.
Ordinarily, you’d have to pay a rich premium for all this — but Yongye is trading at just five times forward earnings, a sharp discount to its expected 40%-plus growth rate. This stock could double in the next 12 months.
Best Cheap Stocks For 2011: Prices for agricultural staples are rising
The bureaucrats can say all they want about benign inflation. Apparently, they haven’t been to a grocery store lately.And prices are still rising at the wholesale level, which means more retail markups in the weeks and months ahead. According to the U.S. Department of Agriculture, producers fetched higher prices for corn, soybeans, eggs, milk and apples last month.
Some of the blame (or credit, depending on your perspective) belongs to the Fed‘s dollar debasement policies. By definition, a depreciating dollar boosts the prices of dollar-denominated agricultural commodities.
But old-fashioned supply/demand imbalances are also playing a major role. A bad Russian winter wheat harvest and subsequent export ban sent prices skyrocketing. Here in the United States, torrential rains in the Corn Belt have left supplies at the lowest levels in 15 years.
Growing demand and shrinking supplies intersect at rising prices. Corn futures have spiked more than 70% since June. Wheat prices have spiked 35% so far this year. Soybeans and sugar are the same story.
And, because beef, pork and dairy producers have to buy mountains of feed for their livestock, rising grain prices will likely spill into the meat aisle as well (there’s typically a six-month lag).
With all this in mind, I strongly recommend readers fight back against the relentless price hikes by converting a few dollars into bacon and cereal — or at least pork bellies and corn.
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Large pharmaceutical companies are facing a crisis. The industry spent a record $65 billion on research and development (R&D) in 2009, but approval rates for new drugs have fallen 44% during the past decade and continue to drop. Also in 2009, drugs launched in the previous five years accounted for only 7% of all sales, meaning that older drugs closer to patent expiration make up the vast majority of sales. The failure rate of drugs in the final stages of development has doubled in recent years.
Best Cheap Stocks For 2011: PFE,GSK
These facts are sobering proof that productivity levels for bringing successful drugs to market have declined severely in recent years. It is leading to soul searching in the industry and large cutbacks in R&D expenditure. Pfizer (NYSE: PFE), one of the largest of the Big Pharma firms, is cutting R&D from 2010 levels of $9.4 billion to between $6.5 billion and $7 billion by 2012. European drug giant GlaxoSmithKline (NYSE: GSK) will cut spending by up to $4 billion and plans to radically change how it tries to bring new drugs to market. One industry source found it extremely troubling that the market sees R&D as destroying shareholder value.Part of Glaxo’s shifting approach will be to outsource the initial stages of drug development. These earlier stages are the riskiest, as failure rates are high and are also costly, given the large number of compounds that must be tested. Finding the needle in a haystack is an understatement when it comes to bringing successful drugs to market. Other companies are following suit.The general belief is that Big Pharma will eventually outsource most of its drug development work to outsiders, be they university laboratories, smaller development-stage pharmaceutical and biotech startups, or companies known as contract research organizations (CROs).
Below is a list of the leading CROs…
Covance (NYSE: CVD) is the largest CRO in terms of sales and market capitalization, but not by a wide margin compared to Pharmaceutical Product Development Inc. (Nasdaq: PPDI). Charles River Labs (NYSE: CRL) and Parexel (Nasdaq: PRXL) are similar in terms of sales, while Icon plc (Nasdaq: ICLR), out of Ireland, is the smallest.
Here is an overview of the two that look most compelling to me from an investment standpoint.
Best Cheap Stocks For 2011: Icon plc (Nasdaq: ICLR)
Hands down, Icon has been the fastest growing of the CROs. In the past three, five, and 10-year periods, sales growth has averaged more than 20% annually, as has profit growth. 55% of its business stems from long-term contracts that are fixed in price, which provides a fair level of revenue stability. The company also counts the top 20 pharmaceutical companies in the world as clients and boasts more than 650 clients total.
Icon is one of the most globally diversified CROs and is also impressively profitable. The company posted operating margins of 11.2% and returns on invested capital (ROIC) in the mid-teens (see table above) in its latest fiscal year. The stock looks a bit expensive looking at the forward P/E and trailing free cash flow, but the company is using this year to invest in its business and expects profits to take a short-term dip, after which growth has a solid chance of returning to historical levels and generating impressive returns for investors.
Best Cheap Stocks For 2011: Pharmaceutical Product Development Inc. (Nasdaq: PPDI)
Pharmaceutical Product Development Inc., or PPDI for short, has been another consistent grower over time that is impressively profitable. The company has been around for more than 25 years, which makes it one of the oldest CRO firms, allowing it time to extend its services to 43 countries. It has strong capabilities in the earliest stages of drug development, such as Phase I clinical trials.
