— “Ahead of the Street” Column, by Mitchell Clark, B. Comm.
Using an investment theme is a great way for an investor to hone an investment strategy. An investment theme can be anything like alternative energy, precious metals, or Chinese stocks. In a sense, an investment theme is similar to a fundamental, top-down analysis that an investor uses to help them come up with specific securities in which to invest.
Investment themes are very useful in the equity speculation business, but because stocks are really securities that are traded in a secondary market, investor sentiment rules the enthusiasm for any specific sector of the market.
One investment theme that was a spectacular success then a failure was solar energy stocks. This group of stocks was really hot in 2007 and 2008. Then, the market’s enthusiasm faded, as valuations became stretched and growth rates began to normalize. This group still hasn’t recovered to its previous levels on the stock market.
There are a number of investment themes going forward that I think have a higher probability of outperforming over the next decade. I believe that the commodity price cycle, which is already strong in oil and precious metals, will migrate to agricultural commodities. While this has real-world implications for people (like higher food prices), it also offers enormous potential for investors. My favorite investment analyst, Jim Rogers, is so bullish on agriculture for the future that he is openly advocating that people purchase farm land. He even says that investment bankers should quit their jobs and learn how to drive tractors.
If you believe that the commodity price cycle will migrate to agriculture, a great way to play this investment theme is by investing in the fertilizer business. The fertilizer industry is cyclical and most analysts on the subject anticipate an enormous uptick in global demand for fertilizer starting in 2010. I think investing in fertilizer companies in China would make for an attractive speculative opportunity.
Another investment theme with excellent potential over the coming years is inflation. Investing in a new inflationary period is relatively easy, but you don’t want to get caught being overleveraged. The inflationary theme is related to high U.S. debt levels, a weaker dollar, growing money supply, higher commodity prices and interest rates that are low just to name a few. It’s like the ultimate, all- encompassing investment theme for the years ahead.
If you believe that we are about to enter a sustained period of higher inflation, then owning real property is good (with not too much debt, as the interest rate cycle will reverse). Owning gold and/or some gold stocks would also be an attractive hedge.
Perhaps the ultimate way to play these two investment themes is just to forget about the world’s capital markets and buy farm land. The commodity price cycle and global inflation are related and what better way to benefit from higher prices than to own a scarce resource that produces higher valued commodities. The great thing about owning farm land is that they aren’t making any more of it. Jim Rogers is making some bold predictions about the future. One thing that I’ve noticed with his work is that he’s often early in his predictions. But, from my analysis, he’s almost always right.