The recent grand theory that the weak US dollar explains the strength in resources is rapidly being discredited. Resource-leveraged stocks continue to correct even while the greenback is at its weakest.

As we’ve noted (see VRI, 15 May 2008, Metal Stocks to Buy Now), the US dollar’s depreciation has certainly played a role in this bull market, but it’s only the icing on the cake.

The problem with the US dollar is now structural, and resource stocks have entered a period of healthy correction after a strong leg up. Investors are booking profits while assessing demand strength. But as we noted last week, the key for 2008 is supply, not demand. (See VRI, 10 July 2008, Focus on Supply).

Problems in the supply chain will push commodity prices to higher levels than they would otherwise reach given the global economic slowdown. That doesn’t mean we expect demand to fall off a cliff; rather, investors will spend more time positioning for the next leg up rather than chasing high flyers. Stay tuned.

This week we’re booking profits by selling Syngenta (NYSE: SYT) and buying Monsanto (NYSE: MON), our new pure agricultural seed play.

Source: Bloomberg

There’s no better time to buy into the undisputed leader in the genetically modified (GM) seed industry. Monsanto’s stock has underperformed this year, and now it’s playing catch up. The recent selloff provides a strong entry point; the stock now trades at an attractive valuation.

Although the stock will be affected by the market’s shorter-term gyrations, the impact will be muted because the seed business is currently in a sweet spot as global food demand changes dramatically.

The big cycle in food demand has begun, and, as is always the case under such circumstances, global production will adjust accordingly. Monsanto will continue to play a vital role in this process for years to come.

Rising demand for food is a well-known problem. The world needs to increase production from existing or, in some cases, diminishing arable land. As incomes around the world rise, so does demand for food, boosting the importance of companies such as Monsanto, which will play an integral role in the future of GM food production.  

In addition, even developed economies are turning toward higher-yield seeds as global economic growth strains supplies. And last but not least, biofuels will continue to put pressure on food prices, regardless of whether current, unrealistic plans are modified.

This practically guarantees industry leader Monsanto greater earnings growth and solid pricing power. This, in turn, allows for high cash flows and financial strength–a condition that gives the company the opportunity to allocate more funds toward research and strengthening its product pipeline. Monsanto is the new addition to the VRI Portfolio. Sell Syngenta and buy Monsanto at current prices.

South Korea-based Portfolio holding Posco (NYSE: PKX) reported record-high profits, with second quarter 2008 operating income surging 51 percent on higher steel prices and effective cost control efforts.

Posco’s close proximity to Asia’s most vibrant steel markets–mainly China–has been a huge advantage in recent years. This year the company has been increasingly challenged by sharply higher prices for iron ore, metallurgical coal and even electricity–the cost of which has been driven higher by rising prices for natural gas, oil and ordinary coal despite regulation that strives to hold down rates.

We still favor the world’s fourth-largest producer, which remains one of the lowest-cost operators in the world despite rising input costs. Management has been investing heavily in new processes that reduce waste, are more favorable to the environment and create fewer capital costs. It’s also targeted expansion in emerging countries such as Vietnam, where demand is only now starting to take off.

Finally, despite rising well off lows reached earlier this year, the stock is cheap at 1.7 times annual sales and less than 10.5 times trailing earnings. It also has considerably less debt than rivals and one of the best client lists in the world. Management has also said that it will continue its share buyback program of roughly 3 percent per year. Buy Posco at current prices.

We’re making a change to the How They Rate table. We’re rating Nucor (NYSE: NUE) a buy and putting US Steel (NYSE: X) on hold. US Steel had a great run this year, so protect your profits.

Nucor remains highly competitive on a global scale as a mini-mill. This process uses scrap steel and is better insulated against spikes in raw material costs. Also, located in the Carolinas, Nucor enjoys access to relatively cheap electricity. The recent weakness in the shares offers a good entry point. Buy Nucor up to 70.

We’re working on a preference guiding system to help ease your understanding of the companies we recommend in VRI.

This is an industry-based letter, so we only recommend resource stocks. We don’t offer multi-industry balanced portfolios, but we do provide what we believe are the strongest resource companies the industry has to offer.

We also often focus on specific market sectors we favor at a particular time and recommend gaining more exposure accordingly to give you a better understanding of the companies we’re considering. Hopefully, VRI will guide you toward the right investment choice.

Many readers have asked for a more comprehensive method, so we’ll provide an “at a glance” presentation of our favorite sectors and stocks. We’ll start with our most preferred picks and move down the list.