06/17/96 EARTHLY STOCKS, HEAVENLY PROFITS

EARTHLY STOCKS, HEAVENLY PROFITS
With world demand for food and energy on the rise, commodities are looking good again
With 99% of his net worth tied up in 2,000 acres of cropland, Indiana farmer Don Villwock lives and breathes the ultimate natural-resource investment. Now, it's paying off in a big way, as prices for corn and soybeans have soared, and he's getting ready to buy more acreage. ``It's a great place to put some money,'' he says.
Although most investors don't want a farm, natural resources are looking attractive these days. Commodities such as oil and grains, even though off their recent highs, have shown sharp price increases, helping many related equities outpace the market at large. The right stocks can provide handsome returns: Fertilizer and oil-refining issues are good bets, top analysts say. For the more adventurous, new financial products offer exposure to commodity rallies without excessive risk or steep fees.
The rise in commodity prices is more than a blip. Strong growth, notably in the developing world, is boosting demand for food, energy, and other raw materials. As a result, a 15-year trend of declining prices is reversing. ``The prospects for commodities are bullish through the end of this century,'' says John Demaine, CEO at London's BZW Asset Risk Management Ltd.
Even a small dose of commodities can help diversify a portfolio. In 1987 and 1990, when the stock market slowed, many commodity investments did well. That's why even the stagnant market for gold bullion looks good to Barton M. Biggs, chairman of Morgan Stanley Asset Management Inc., who considers U.S. stocks overvalued: ``I'm looking for a place to hide,'' he explains.
COTTONSEED. The easiest way to ride the commodity wave is to invest in companies that benefit from rising commodity prices. For example, the bullish global outlook for grain prices holds great promise for the stocks of fertilizer makers. IMC Global, Potash Corp. of Saskatchewan, and Freeport-McMoRan stand to win, as food demand soars in China and other developing nations, predicts analyst David C. Nelson of NatWest Securities Corp., who recommends all three. IMC already counts China as its biggest market outside the U.S. and expects robust growth in the future. ``Importing food is a lot more expensive than importing fertilizer and growing it yourself,'' notes Wendell F. Bueche, IMC's chief executive officer. Seeds, pesticides, and farm equipment may also gain. But be careful: Delta & Pine Land Co., a cottonseed outfit, trades at an Internet-like price-earnings ratio of 60, based on 1996 estimates. NatWest recently downgraded the stock from a buy because of its steep valuation.
Investors mulling over energy stocks have a similar problem: The obvious picks have gotten pricey. Yet refining stocks are an exception, says Frederick P. Leuffer, an oil analyst at Bear, Stearns & Co. While refining has been a disappointment in recent years, Leuffer believes tight gasoline inventories, robust demand, and limited capacity bode well. His No.1 pick is Ashland Inc.: ``There are a lot of hidden gems within the company--and not a lot of risk on the price.''
Looking abroad can pay off, too: John Zemek of money manager Equitilink Group in Sydney recommends Woodside Petroleum Ltd., an Aussie exploration company set to reap big dividends from Japanese demand for gas. In the U.S., its American depositary receipts trade over the counter
One problem with natural-resource stocks is that they may not closely track the move in commodity prices. At first blush, it might appear that gold stocks should be in the doghouse. After all, gold prices have hardly budged in the past year. But some gold stocks soared as a rash of new discoveries added to future earnings and as speculation bloomed. And the big oil companies make much of their money in other ways besides drilling for oil.
An alternative is to seek one of the new investment vehicles offering exposure to commodities with less risk. Since a slow start in November, 1991, Goldman, Sachs & Co. has sold more than $200 million in structured notes at a minimum of $50,000 apiece. These offer returns pegged to the prices of energy, metal, and agricultural commodities. Last year, they showed a total return of 21.7%. The firm predicts a 16% return on the notes over the next 12 months.
LESS VOLATILE. Across the Atlantic, BZW has attracted $170 million to its closed-end Commodities Trust, which trades on the London Stock Exchange in shares denominated in pounds. The fund, benchmarked to a Goldman Sachs commodity index, invests mainly in futures and swaps. It keeps enough cash on hand to cover the underlying value of its derivatives positions, making it less volatile than a leveraged fund, according to CEO Demaine. Even so, strong commodity trends boosted its value 39% from October to May.
Regulations make it hard for U.S. mutual funds to invest directly in commodities. Still, a few are pushing the limits to get more bang from rising prices. The $10.3 million Hard Assets Fund of Van Eck Global, launched 18 months ago, invests primarily in resource stocks, such as Louisiana Land & Exploration. But it also devotes assets to futures and structured notes, letting manager Derek S. Van Eck trade directly in commodities: He's bullish on tin and natural gas. Oppenheimer Funds in New York, meantime, is seeking Securities & Exchange Commission approval to launch a fund similar to BZW's.
Individuals should forget about playing futures on their own: Some 85% lose most or all of their capital, according to industry estimates. Buying index options on gold, energy, or other sectors is a better bet, since risks are limited to money spent up front. But many make poor choices, failing to consider the effect of time on the value of their investments. ``Options are like a bucket of sand with a hole in it,'' notes T. Rowe Price fund manager George A. Roche (box). And those tempted by the direct approach--of purchasing everything from oil-and-gas land to gold coins--run risks ranging from paltry returns to outright scams.
Some believe that commodity-trading advisers, who invest clients' money in futures, are the best available means of playing hard assets. While the fees are notoriously high, managed futures can more than compensate with breathtaking results in strong markets. Brandywine Asset Management's $126 million Benchmark Program, for instance, turned a bullish bet on grain and soybean prices into a 19% gain in April alone. The ranks of talented futures managers are growing especially fast in Europe, where the booming U.S. stock market poses less competition for investment dollars. Wherever they live, though, the ideal managers have long track records and trade a diverse array of markets, says Merrill Lynch & Co.'s futures strategist William O'Neill.
In a world where technology rules, investing in grain and gold seems almost a quaint notion. But in a global economy where the demand for materials is rising, an investment in commodities can make a great deal of sense.
By Greg Burns in Chicago