Transportation Players Provide a Safer Route to Commodities

By Chat Reynders  APR 22, 2013 11:00 AM

Investors should stop chasing China, and instead focus on operating companies.


China has served as the centerpiece for several investment trends in recent years. However, the region’s growth rate and industrial philosophies should have been seen as red flags. Concerns abound when it comes to investors’ emphasis on commodities, which hinge on China’s commitment to the infrastructure boom – a phenomenon that is not sustainable in its current form. 
As my firm noted in a recent discussion paper (Investing In Innovation: Uncovering Opportunities Away From the Herd), sound investments are not generally dependent on regional lifts. The climate in China supports that philosophy; we recommend staying away from direct investment in the region as a whole and looking instead for individual success stories that will emerge from the situation as winners.
Over the past decade, a fundamental expectation of continued strength in industrial, energy, and agricultural commodity pricing has been based on outsized Chinese growth and hyper-development. The seemingly constant focus on infrastructure drives the belief that commodity prices must continue to rise. At this point, however, demand fundamentals may be eroding and new technologies may drive an increase in supplies over time. 

The first red flag comes from the country’s penchant for spending an ever-increasing percentage of GDP to drive incremental GDP growth. The goal for local and central governments has long been to reach set growth targets -- whether it meant building empty cities or wind farms that never linked to an electrical grid. China has recently backed down on these growth targets, but it is hard to measure what is sustainable without extremely high levels of reinvestment. The hope is that the country can wake its population in order from China to become a consumer powerhouse, but that transition is a long way off.
China has also created a "debt bomb" through its aggressive local lending. People forget that the local governments were already bailed out by a TARP-like program in 2011, and the Wall Street Journal reported that in Q1 2013 the total social finance measurement increased to a record 6.2 trillion yuan. The government is currently tightening rules in order to rein in real estate speculation, but the likelihood of a hard landing is high and many argue that, at the very least, the required deleveraging will mute growth significantly.
This all brings us back to commodity prices, which have been driven by this misleading growth. Commodity prices are now significantly higher than they were a decade ago, and the run-up displays symptoms of a bubble that could come apart in the near term.  In this light, we believe that the most prudent commodity-based opportunities are investments in operating companies that may benefit from commodity price strength but are not wholly reliant on commodity pricing to drive earnings growth. 

Here are a few stocks that fit that description:

Canadian National Railway (NYSE:CNI) is a promising company in this category, as it has opportunities to advance in intermodal and energy resource markets. The company operates more than 20,000 miles of rails and has the only network in North America that connects three coasts (the Atlantic, the Pacific, and the Gulf of Mexico).

The company remains the most efficient of the major railroads and represents a strong investment within the increasing movement of domestic and important goods throughout North America. In 2012, its revenues increased 10%, experiencing strong growth in the oil and gas industries. As intermodal shipments increase due to expansion of global trade, Canadian National Railway has a bright future ahead of it.

Bollore (EPA:BOL) is one of Europe's five largest transport logistics companies specializing in chartering by air, sea, and land for customers. Its extensive port operations throughout the world and exposure in emerging markets have kept it on the cusp of economic growth in Africa. Indeed, the World Bank estimates that Africa's sub-Saharan economy grew by 4.6% last year, while the global economy grew by only 2.4%. It further suggests that growth is expected to continue through the medium-term. 

Tomra (STO:TOMO) is the world's largest reverse vending machine manufacturer. In recent years, Tomra has diversified its operations beyond this initial offering by using a deposit system. With thirty billion used beverage containers passing through its machines annually, and 450,000 tons of metal recovered annually, Tomra is expected to continue to grow, as bottle recycling laws are increasingly adopted and the world concentrates on recycling for environmental purposes. Tomra is a key player in the space, and is positioned to capitalize as new markets adopt this model based on growing environmental concerns.
All of the specific securities identified in this article are current recommendations of Reynders, McVeigh Capital Management, LLC (“RMCM”) on behalf of its advisory clients.  The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for RMCM’s advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable. Past performance is no guarantee of future results.
No positions in stocks mentioned.