Thursday, September 27, 2012
Buy Agriculture Now?
I am not a financial professional, and cannot recommend equities for you to buy. Having said that, I want to share my analysis with you. I do this as a means of teaching others a (relatively) simple approach to arriving at price targets. Why agriculture? This is a seasonally strong period of the year for agriculture stocks. Second, my calculations indicate there is as much as a 24 percent upside to the Exchange Traded Fund (ETF) with the ticker symbol COW on the TSX as at Saturday, Sept. 22. I will provide additional details of my calculations over the next few posts, but first, a little more about COW.
iShares lists the top holdings in COW by weighting. By adding the weightings, we can see the top 13 companies make up 81 percent of the fund. These companies are headquartered in Canada, the U.S., Chile, Brazil, Japan, and Switzerland. As in this case, ETF's give me the most diversification at the cheapest price. I could go out and buy each of the 13 companies (or only the one's I like), but the cost of the commissions to do so quickly adds up.
Prices of ETF's such as this one follow an index. As such, there is no fund manager deciding which company to buy, and when. iShares manages the fund so it reflects the holdings in the index it is tracking. The price follows that of the index because institutional providers package up the stocks of companies in the index to sell to iShares when it is cheaper to do so, and buy them back again when they become cheaper than the stocks. As a result, the constant buying and selling of ETF units causes the price of the ETF to mirror the index of stocks. Price is a function of earnings. At any given point, we can show the price of a share of stock as being the amount of company earnings divided by the number of shares multiplied by some number. In other words, Price = Earnings/Share Times X. Calculate the future price based on future earnings for most of the companies in an ETF, and we can compute the target price of the ETF.
Technical Analysis only goes so far when it comes to individual stocks. That is doubly true of stocks which have a limited trading volume. A volatile market such as the one we find ourselves in currently compounds the problem even more. A price of a widely held ETF of widely held stocks is much more predictable than a single company. The fundamental analysis I am in the process of sharing with you shows me what to buy. I then use technical analysis to determine when to buy what I have calculated as having a cheap valuation relative to the current price.