I've been busy buying ASX shares that look like opportunities amid recent share market declines and the drop from the peaks we saw in 2021.
Certainly, we can make returns from a whole host of different sectors. There are some companies that usually see consistent performance – for example, companies like Woolworths Group Ltd (ASX: WOW) and Telstra Group Ltd (ASX: TLS). Other companies can see very cyclical performances, such as ASX mining shares and sometimes discretionary retailers.
I think agribusinesses can also be a hunting ground for cyclical opportunities. One of my latest investments has been Elders Ltd (ASX: ELD).
What does Elders do? It works closely with primary producers to provide products, marketing options, and specialist technical advice across rural, wholesale, agency, and financial product and service categories.
It's also an Australian rural and residential property agency and management network. The company's feed and processing business segment has a beef cattle feedlot in New South Wales. I think it holds a very strong position in the Australian agricultural sector — it's just not a farmer.
This isn't usually the type of ASX share I invest in, or even write about much, but I saw it as an opportunity and invested for two key reasons:
Heavy sell-off
Over the past year, the Elders share price has fallen by 40% and it's now down 57% from April 2022.
Not many other S&P/ASX 300 Index (ASX: XKO) shares have fallen that hard during this period.
I love looking at ASX shares that have sold off like that because a recovery can lead to a strong return. Imagine a share price that's fallen from $10 a share to $5 (a 50% drop). If we were to buy it at $5 and it recovered just halfway to $7.50, this would be a return of 50% for the new investor.
Of course, a share price isn't guaranteed to go back up just because it has declined. Indeed, there's every chance it could fall further from here (particularly if the FY23 result disappoints) and, perhaps, I invested too soon, but I'm comfortable with that if I did. I'm thinking about a potential recovery in a few years.
Elders said it's experiencing weakness from rural products sales, greater pressure on the rural product gross profit margins, and weakness in the prices of cattle and sheep with lower than forecast volumes traded.
The company also said it's experiencing cautious customer sentiment in light of uncertain seasonal conditions in some farming regions, with warmer and drier conditions now anticipated with El Nino's arrival.
The market is very aware of the deteriorating conditions. That's partially why the Elders share price has fallen so heavily.
I often like to make the point that strong businesses can become even stronger during downturns because they have stronger balance sheets and can acquire competitors. Elders has been doing just that. It recently bought Charles Stewart Group in Victoria, which will add approximately $5 million of annualised earnings before interest and tax (EBIT) in the first 12 months under Elders' ownership.
Wetter weather to return (at some point)
Australia cycles between El Nino (drier) and La Nina (wetter) weather patterns. The arrival of El Nino is certainly not good news for the demand for Elders services or profit.
The dry conditions of 2019 saw huge bushfires in Australia and the Elders share price experienced significant pain, as we can see on the chart below of the last six years. Conversely, after El Nino and the fires ended, the company saw stronger operating conditions and the Elders share price soared.
How long will this El Nino last? I'm not a meteorologist so I don't know, and I'm not betting on how long it will take. However, I suspect when El Nino does end, it will mean better times for the ASX share. I'm willing to be patient until then.
What is the Elders share price valuation?
According to the projections on Commsec, Elders shares are valued at 10 times FY24's estimated earnings and they could pay a grossed-up dividend yield of 5.5%.
