The maligned economist who backs one of my favourite stocks
Bengt Saelensminde Feb 04, 2013
Last week, I wrote an article suggesting you should be very wary of small-cap and AIM stocks...
"But Bengt, you do know that one of your favourite stocks, Agriterra, trades on AIM!?" came back the retort.
Well, of course I know. The point I was making was that if you chose to buy these stocks, then I reckon you need to make sure that: a) you're buying near the bottom and b) the stock has got plenty of cash – because coming back to the market for more of the stuff will obliterate your investment.
Let's look at those points today. Because not only does Agriterra meet these two criteria, but it is also operating in a region that has vastly more exciting prospects than we do in the UK. And today, I'm going to call in a much maligned economist to prove it...
Why Agriterra tanked
Let's start by looking at the chart...
Five-year chart of AGTA
The chart tells the all-too familiar tale of a stock set to disappear out of the investment universe. Why has this happened? Well, because Agriterra kept raiding its shareholders for cash.
As the company made the switch from an African oil explorer to agriculture, it tapped shareholders for finance. And that completely wiped out confidence in this company.
The thing is that last week the company told shareholders it has received $28m from an old oil asset that's suddenly come good. And there should be more to come. Not only from the Ethiopian asset they've just cashed in, but other legacy oil claims too. The CEO, Andrew Groves, makes the point:
"This injection of capital into our business, representing approximately 50% of our market capitalisation, will facilitate our rapid expansion plans across all our agricultural divisions, enabling the Group to become a significant pan-African food producer and processor."
Right, so the share price is already deeply under water... and we've got cash. Next thing is...
An exclusive report from The Right Side
Is this business going anywhere?
You may have heard of the economist Thomas Malthus. He presented a rather grotesque vision of society. In fact his theories influenced Darwin when he was working out natural selection and survival of the fittest. The difference is Malthus was talking explicitly about humans.
He said that exponential growth of the human population would be stymied by famine and disease. That we'd overpopulate the planet and there wouldn't be enough stuff to go round.
That was a deeply unpopular position to take at the time. And over the years Malthus has been proved wrong on just about every count. Humanity was willing and able to stymie its own population growth. And free markets produced innovative solutions to reap harvests not only big enough to sustain the population, but make great strides in living standards too.
But I fear that Malthus had a point. It's just that his timing was wrong. Here are four important reasons that are changing... and four points why AGTA could be in the sweet spot.
Four things to consider
The time when governments sought to actively suppress population growth are coming to an end – recent reports say China is considering relaxing its 'one child' policy. As the likes of China have opened up, we have seen a reacceleration of global prosperity and population growth over the last few decades.
But the earth's resources are finite. China realises this. That's why they're crawling all over Africa setting up trade agreements, buying up production and producing assets. It's the final frontier. And it's interesting to see the West suddenly starting to reassert influence in the region!
So African food producer AGTA is in the right place.
The second point to consider is what you might call 'the learning curve'. It's been some time since major advances in agriculture have helped boost food production. In the early 20th century, farmers could keep pace with population growth by clearing vast tracts of forest and prairie to use as farmland. When the world began running short of new arable land, farmers found ways to increase harvests. In the 1960s, crop yields tripled with the adoption of new crop varieties, irrigation, fertiliser and pesticides, unleashing a 'green revolution'.
But you can only use these innovative techniques to increase production out of the earth so far. And while there are still frontiers that can benefit from applying the learning curve to farming and mining, those areas are now few and far between. But hey, Africa still looks like a good bet!
The third point to consider is that populations now live longer. This is a global phenomenon. More people, more demand for food. Enough said.
The fourth point I want to make is a common theme here at The Right Side, and that is the gross mismanagement of Western economies.
It is my contention that much of the West's fantastic living standards come at the expense of the developing world. Basically, strong currency allows us to import cheap goods from a developing world that doesn't know any better.
But the world is waking up to the ruse. Western currencies are re-aligning and that puts them on a downward trajectory. This would have happened without the crazy antics of our central bankers. But the new fashion for money printing only accelerates the outcome.
This is why I think it's important to have a decent slug of your savings invested in companies operating outside the Western sphere. I've been hooked on the stuff that Lars Henriksson is writing. Lars makes a very compelling case for investing in Southeast Asia right now. And as someone who has spent most of the last two decades living out there, he knows what he is talking about. If you do anything this week, make sure you sign up to his New World email.
And actually, you should keep an eye out for a new report that Lars has written. It might be the most exciting emerging-market story I've read since the early days of the China boom. I picked it up last week and it's a great read.
As for Agriterra, I can't think of anything better than a Western company bringing modern techniques to investment's most exciting new frontier.
It might be a serious gamble. And yes it does trade on AIM. And frankly, yes, the company is still not making money.
But I think it has a fighting chance of fulfilling its brief. And that is to become a leading pan-African food producer. It's got the investment capital, it's in the right place and it's cheap. What's not to like?
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
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