Adding to position in Potash Corp - Supply Constraints Remain (POT)
Posted on | October 15, 2008 Time: 7:22 pm |
I know we are all getting a bit shaky at the volatility that has become commonplace in the markets. I am surprised to see Potash Corp. dip to new 52-week lows today - shares were down about 20% at one point as Basic Materials and commodity stocks continue to see a mass exodus of investor capital.
Two things keep me interested in this stock, the first of which applies to all the materials. Even though credit market liquidity is still dried up, backstop liquidity and the money supply have grown astonomically in the past month. We are not-so-quietly creating the perfect environment for rampant inflation starting about one year from now. This will put the wind at the back of commodities once again…
The second talking point is specific to agriculture and potash - supply constraints are severe, with no new capacity of any note coming on line for several years. This is unlike the base metals or fossil fuels. Food demand will be the one thing remaining if all other consumer demand gets eradicated. I look for contract rates on potash, nitrogen, and phosphates to drop no more than 20% over the next few quarters, which should lead to a proper revaluation of POT shares on a cash flow and earnings basis.
My earlier investment thesis centers on potash supplies and worldwide food demand. With Potash Corp shares now at just 9x trailing earnings and 6x trailing cash flows (operating), minimal debt and a stronghold on world supplies, this will now be the largest position in the Secular Trends Model Portfolio. The mining strike may crimp current earnings, but the net effect on future contract rates will probably be positive.
Adding 375 shares at $79.66
Ryan Barnes
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