Following up from last week’s post DOW 12,000…Now What?, where we asked what is an investor to do when the broad equity, bond, gold and energy markets have all rallied handsomely, we offer the following actionable investment idea.
COW is an exchange traded fund (ETF) that seeks to track the overall returns of the Dow Jones-UBS Livestock Total Return Sub-Index. The index is composed of two futures contracts, lean hogs and live cattle. We find it compelling and worth taking a closer look for several reasons.
Looking at the fundamentals, the demand for meat from the United States is strong. With the price of grain at record highs, many ranchers are choosing to take their “breeders” to slaughter resulting in a significant reduction to supply. One of the themes that investors try to capitalize on relates to the many opportunities that present themselves in a global economy as the quality of living improves in under-developed nations around the world. From infrastructure to technology, opportunities abound in these countries and a change to a higher protein diet is one of many known improvements that consistently take place. Accordingly, the increased demand for livestock may prove to be an ongoing driver of price for the years to come. In fact, China has been experiencing a shift to beef accompanied by a reduction in supply and the US recently became a net exporter there for the first time. Some of our other (in depth, proprietary) research suggest that there may be a lot of people in China.
Since the fundamentals for “COW” appear strong, we next look to the technicals and the chart puts us in a good moo-d. Unlike so many other segments of the markets, it is not up 75-150% over the last two years. It isn’t in free fall either. The long-term chart looks appealing since it was in a down-trend for some time, consolidated, turned upwards and remains in an uptrend with momentum.
We believe COW is a compelling opportunity with sound fundamental reasons to drive demand/price and attractive technicals.* We will be watching it closely and feel that it may prove to be a timely opportunity with significant upside potential over the next six to eighteen months.