Jane Mendillo of Harvard Management Company, which manages Harvard University’s $32 billion endowment, told the gathering of investors at the Delivering Alpha Conference last week that she looks at an increasing world population, and a wealthier middle class in developing countries, and believes that the demand for natural resources such as timber, food, and water will increase in the long term. Therefore, she is bullish on companies that do business in related industries, calling natural resources “our favorite area.” We investigated her investment thesis and came up with a list of stocks we think she and similar-minded investors would like:
Plum Creek Timber (NYSE:PCL): Plum Creek Timber operates as a real estate investment trust that owns and manages forest land. Timber is a natural resource whose price might be expected to rise with global demand for construction, including residential, commercial, and industrial construction. Plum Creek Timber’s stock price has risen a few percent over the last five years (crossing into the black this year, when it has risen 8%), and the company pays shareholders a 4.2% dividend yield. First Eagle Investment Management owned 7.6 million shares of Plum Creek Timber at the end of March as part of a diversified portfolio after growing its position last summer (see other stocks from First Eagle).
BP Plc (NYSE:BP): Save for El Paso, which was in the process of being acquired at the time, BP leads the ten most popular energy stocks among hedge funds as of the end of March. Fifty five hedge funds, including renowned value investor Seth Klarman’s Baupost Group, had the stock in their portfolio. While BP has had public relations difficulties over the past few years, it is a leading oil exploration and production company which stands to benefit from Mendillo’s favorite trends. It is also trading at five times trailing earnings and paying a 4.6% dividend yield, making it a value stock as well as one whose earnings will rise if oil prices rally on long-term global development.
Potash Corp of Saskatchewan (NYSE:POT): Potash sells a variety of fertilizers, which benefits from higher agricultural demand. The company is vertically integrated, performing every step from mining the raw potash (a crucial ingredient) to selling the finished fertilizer. Potash Corp of Saskatchewan is up over 70% in the last five years and now boasts a $39 billion market cap, with a trailing P/E of 14. Adage Capital Management owns 5.7 million shares after increasing its stake since last September (find out what other stocks Adage likes). As it happens, Adage is co-managed by two alumni of Harvard Management; the endowment has a minority interest in the fund and has invested $1.8 billion.
Watts Water Technologies (NYSE:WTS): Water is the trickiest aspect of Mendillo’s thesis to invest in. There are many water utilities in the U.S., but these companies are not exposed to the upside of global development. Soft drink companies produce bottled water, but that does not seem to fit either. We would suggest that investors look at Watts Water Technologies, a $4 billion market cap company which provides water pumps and flow systems worldwide. The company’s strong expected growth brings its forward P/E under 13, it pays a 2.2% dividend yield, and it is also a favorite stock of Doug Silverman’s Senator Investment Group, which initiated a 1.5 million share position in the first quarter of 2012 (see Senator's other stock picks).