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Three stocks to short during the drought

by , 26 November 2015

Strange weather we're having...

In the day time it's an absolute scorcher. In fact, walking outside yesterday was hotter than what I felt in Dubai last month.

But in the early hours of the morning, it's so freezing that I need to put on a jersey or two. Not to mention we still haven't seen the summer rains we're used to.

But what does the weather have to do with Trading Tips?

Simple: The erratic temperatures and drought we're experiencing is causing huge havoc with food producing companies.

It's time to start looking for shorts in the market. And there are three specific shorts that I have in mind.

Let's dig a little deeper.

The top 100 JSE companies are in trouble!

Did you know that the top 100 JSE companies use around 8 billion cubic metres of water per year? And the biggest agricultural food producing companies use 11 times more water than all the others put together.

This means, investors need to be cautious of exposure to food supply water-intensive companies that are bound to suffer the most from the sort adverse weather conditions we’re experiencing now.

According to the corporate finance manager at Deloitte KwaZulu-Natal, the current drought “will cost farmers an excess of R10 billion”.

And this isn’t just any drought.

We’re experiencing the worst drought in 23 years thanks to strong El Niño weather patterns in the Pacific Ocean.

The current El Niño is predicted to decrease South Africa’s rainfall by up to 150mm - that’s 33% less rainfall expected than usual.

The little thunder and hailstorm we had last week might have revived the grass in your garden, but it has hardly had any effect in reversing the drought damage already incurred by farmers, or in filling up our near-empty dams.

The damage has been done, and I expect it to start showing in the share prices of our water-dependant agricultural and food producer stocks shortly.

Here are the stocks to short.

Astral is about to take a nosedive
    
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The first company to bet against is Astral.
Astral is a poultry and feed producer. Their business involves poultry production, animal feed manufacturing and broilers.
Since January, we’ve seen Astral move into a sideways pattern. The prices have been bouncing from highs of around R200 a share to a low of R152 a share.
But the problem is that in the last couple of months, we’ve seen lower highs form with Astral.
This means, the break is more likely to happen to the downside.
And so, my first target for this food producer is down to R110.03 in the next few weeks.
Next company I’m looking at is RCL 

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RCL, formerly known as Rainbow Chicken, owns well-known brands such as Foodcorp, Rainbow and TSB.

When you look at the daily chart, you’ll notice the share price has been dropping since January this year, down to R17.50 from high of R19.00.

There seems to be a tendency to keep making lower highs, which tells me the momentum for the share price is down.

I expect RCL to drop down once again to R14.92, which will be my next target.

The third company is the one I’m worried about the most

It’s one that I’m going to short very soon because I expect a lot of downside to come.

But I want to give you my exact levels and analysis on where the best place to short and profit from this falling food company.

If you’re interested then click here and I’ll add you to my private mailing list and notify you as soon as it hits my entry level.

Always remember,

Wisdom yields Wealth
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Timon Rossolimos 
Senior Editor:  Trading Tips 
Head AnalystRed Hot Storm Trader
Author:           94 Top Trading Lessons of All Time 
PS: watch our video on the end of the South African Rand!
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Three stocks to short during the drought
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