Hunting for pockets of pessimism: Agricultural machinery

In our previous paper, we sketched our framework for searching for stocks that fit our definition of attractively priced relative to their long-term fundamental intrinsic value.

We introduced the concept of pockets of pessimism to describe industries or companies where the market’s focus on weak short-term profitability provides an opportunity to invest where long-term valuations look attractive.

Likewise, we described how we aim to steer clear of pockets of optimism, which are areas of the market that we think are expensive, and where we believe investors are overestimating long-term earnings power—two factors which, taken together, can lead to poor long-term returns.

Here, we explore a current example of a pocket of pessimism that we believe has the potential to generate attractive long-term returns—the agricultural machinery industry. In doing so, we hope to shed further light on a philosophy which has been central to our investment approach since the late Sir John Templeton established the first Templeton fund in the early 1950s and demonstrate how the investment team at Templeton Global Equity Group seeks to profit from contrarian value opportunities.

Below we list the high-level characteristics that define a pocket of pessimism. To offer a current example, we present the prevailing conditions of the agricultural machinery industry, which we believe ticks every box. In this paper, we will explain each of these characteristics.

We conclude this paper by suggesting that the agricultural machinery industry heading into 2025 has all the characteristics of one such pocket of pessimism: A confluence of negative short-term factors has led to the underperformance of share prices of equipment manufacturers relative to the broader market.

This reaction may be justified if the reasons for pessimism brought into question the long-term earnings power of these companies. However, we view the turbulence in the market as a temporary slump. This situation creates an attractive investment opportunity, as the market’s emphasis on recent and near-term gloom provides an excellent entry point into an industry with a solid fundamental profile and favorable growth prospects.