Warren Buffett is one of the greatest investors of all time. Accordingly, many investors (me included) follow how the Oracle of Omaha manages his portfolio.
Buffett has stayed away from most commodities over the years. However, Buffet has made numerous investments in the energy sector and a number of other niche investments as well over the years.
Commodities super cycle likely to continue
A consensus is starting to build that the commodities super cycle we’re in now may have a lot of room to run.
Specifically, agricultural commodities are starting to take off. Commodity staples such as corn and soybeans are taking off once again. The commodities asset class is generally viewed as a portfolio hedge inasmuch as these staples tend to be negatively correlated to the U.S. dollar. Commodities tend to also be low beta. This means these assets tend to do less poorly in down markets. The inverse is also true, as commodities companies like Nutrien tend to lag in bull markets.
With the potential for some prolonged pain on the horizon, many investors seem to be content to let some money ride on commodities. Buffett has dabbled in some trades recently that may suggest he’s more open to defensive plays like Nutrien right now. That said, Buffett tends to be bullish on the long-term growth prospects of the American economy, so whether or not an investment in a company like Nutrien may materialize remains to be seen.
Difficult-to-find commodities players with a moat
As I’ve discussed in the past, Nutrien is one of those rare companies that have a wider moat (or durable competitive advantage) than most may think. I derive Nutrien’s moat from two key differentiating factors.
First, the company’s robust network of retail assets provides a level of cash flow stability its peers don’t have. Nutrien is a vertically integrated player in this space. This business model provides investors with a much better long-term growth profile in the agricultural inputs market. In my view, Nutrien’s assets are best-in-class, and the company deserves its current valuation multiple. At first glance, a price-to-earnings multiple of 85 might seem ridiculously high for such a company. However, I think the market is pricing in the aforementioned effects a commodities super cycle could have on the earnings of this sector.
Secondly, Nutrien is a leader in digital agriculture. The company provides a range of tools for farmers to manage planting and harvesting cycles. Indeed, this is expected to be a key growth driver for Nutrien long term. I think technology will transform this sector over time. And the fact that Nutrien is on the cutting edge of providing this technology? That’s just another reason to own this stock right now.