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Top agriculture stocks to grow your wealth

Photo of Michael Gable, Fairmont Equities By Michael Gable, Fairmont Equities

min read

What the share-price charts say about Graincorp, Costa Group, A2 Milk and Treasury Wine Estates.

For several years now, investors have known of Australia’s growing potential reputation as the “future food bowl of Asia”.

We have a history of digging stuff out of the ground and selling it overseas. But it can be argued that growing stuff in the ground and selling it overseas has more potential for the future.

When looking at companies to invest in on the Australian market, there are plenty of resource and mining companies to choose from. However, the choice of agricultural companies is more limited. If investors wish to tap into this theme they need to tread carefully.

In the past year, we have seen some companies face hurdles in trying to sell their wares into China. Stocks such as Blackmores and Bellamys have seen large falls in their share price and investors are reminded that selling any commodity, hard or soft, can be fraught with risk and volatility.

Aside from the opportunities of selling into Asia, the Australian food market has also changed over time. Australian consumers are becoming more discerning when it comes to produce, as well as being more health conscious.

This article looks at the charts of four stocks in that sector – companies which are different to each other to help investors find some diversification. They are Graincorp (GNC), Costa Group (CGC), The a2 Milk Company (A2M) and Treasury Wine Estates (TWE).

(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).

1. Graincorp

Source: AmiBroker

Graincorp is a $2-billion grains company focusing on storage and logistics, marketing and processing. Most investors would be familiar with Graincorp as it was on course to be taken over five years ago until the Government blocked the sale. That naturally led to a drop in the share price and it has not made much headway since.

Earnings used to be very cyclical but now Graincorp has invested in other areas such as malt and oils. However, there is still a large cyclical component, and record summer and winter crop production forecasts already seem baked into the share price.
Nevertheless, the chart shows some potential for further upside. Early last year Graincorp retested the 2014 low and bounced off it strongly. The stock is now making some higher highs and higher lows and that is crucial if it is to establish a new uptrend.

Looking at the channel in which it is now trading, we can see potential for weakness back towards $8.50. If so, that would provide a better entry point. After that, we expect Graincorp to head higher. The first major level of resistance that investors need to be aware of is near $10.

2. Costa Group

Source: AmiBroker

Costa Group is the new kid on the block, having listed only two years ago, but in that time its market capitalisation has more than doubled to nearly $1.5 billion. Costa Group is involved in produce, logistics and farming.

The recent results in February beat company guidance with earnings driven by increased berry volumes and higher pricing for tomatoes. The question for investors is whether the growth rates, which are priced in, are achievable.

The other cloud over the company is the Chinese joint venture. It is going well but we have seen expansion into China to be a double-edged sword for companies as they try to find their feet and get established.

The chart for Costa Group shows a stock that is trending higher. The trend is your friend, as they say, so investors may see further upside.

Momentum indicators such as the Relative Strength Index show the stock to be overbought, but stocks in a strong uptrend can exhibit this behaviour for quite a while.

As the share price accelerates here and becomes vertical, we could see even more upside. However, investors should be wary of the sustainability of these vertical moves and be prepared for a healthy consolidation.

3. The a2 Milk Company

Source: AmiBroker

The a2 Milk Company is known to many Australians as a producer of milk and related dairy products that contain a strain of protein known as A2 instead of a combination of A1 and A2. The primary markets are Australia, New Zealand and the UK, but with increasing infant formula sales to China.

It is this latter strategy that makes some investors nervous in the wake of missteps made by Bellamys in the same marketplace.

However, until now, The a2 Milk Company seems to have navigated its penetration of the Chinese market successfully and the most recent results in February were above expectations.

The a2 Milk Company has been listed for only two years and has often proved to be a tough chart to read. It tends to have sharp moves up and down and it can be difficult to know if any falls in the share price will be followed through with more selling.

Despite the messy chart, for the moment we can safely say that the stock is trending higher and investors in The a2 Milk Company would have no reason yet to sell.

If the stock does wish to take a breather, we would be looking for it to find support in the mid-$2 range. If that were to occur, we would be presented with a low-risk buying opportunity – all else being equal.

4. Treasury Wine Estates

Source: AmiBroker

Treasury Wine Estates holds a portfolio of well-known Australian brands such as Penfolds, Lindemans, Wolf Blass and Rosemount Estate. They sell to more than 70 countries around the world, including the US and China.

The share price failed to go anywhere a few years ago while in the midst of a wine glut but improving conditions has seen the price go from $4 a few years ago to above $12 now.

Treasury’s half-yearly results in February were very good and the share price jumped even higher. The average analyst target shows the stock to be fully priced but the range of targets start at $10.45 and extend to $14.

It all comes down to estimating future growth and that can be very difficult. The chart shows a stock the market is still happy to buy into. It has been trending nicely over the past couple of years.

What I look for in a trend is if the moves up are quick and on high volume, and any pullbacks are shallower and on lower volume. If we see these signs it means the trend is strong and sustainable. This is what we are seeing here with Treasury Wine Estates.

The chart shows that the market is happy with the stock at these levels and happy to buy in on any dips. The trend for the moment seems more sustainable than the other stocks mentioned here. We would therefore be happy holding a stock that displays these characteristics.

About the author

Michael Gable is managing direchttp://www.asx.com.au/prices/charting-library.htmtor of Fairmont Equities. He helps his clients achieve higher returns from their share portfolios by combining both fundamental and technical analysis. He is also a media commentator who regularly contributes to Sky News Business, the Australian Financial Review and online investing sites. Visit www.fairmontequities.com for free stock picks and trading guide, and to apply for a free portfolio review.

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