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Is Potash Corp. Tracing a Bottom in Pen?

Posted on | October 30, 2008 Time: 2:34 pm |

From the outset of the month, Potash Corp. (POT) joined the agriculture, energy, and materials stocks on a gyrating ride, consistently twice as volatile (or more) as the overall market. And that’s really saying something considering the VIX has been tailgating in the $50-plus range for the whole of the month.

Investors who simply like the sector - or some of the individual leaders in it - face a terrible choice; step in to the falling knife and potentially get stabbed, or stand on the sidelines until “proof” emerges that the sectors have bottomed. The latter sounds like a great strategy until you realize that you’d likely miss out on 40-50% of upside until your version of proof was confirmed.

Potash Corp. is a perfect example. The stock was down so far so fast (75% in 3 months) that traditional ranges of valuation or stop-loss trading had no functional purpose. And due to a patchwork, opaque marketplace for the company’s core products (potash, phosphates, nitrogen) it’s not easy to tell what the pricing environment is really like. In this market, no news is bad news, and existing trends will continue unabated until you bring all the facts to the table.

Earnings Reports Gave Hints

In early October, competitor Mosaic (MOS) posted earnings that disappointed the market at the time, as this was before global recession was fully baked into the equity markets. But Mosaic did hint that phosphate and potash prices, although flat to down slightly on a sequential basis, were still holding up well. Much better than oil, much better than grain futures, and much, much better than the industrial metals and ores.

Potash Corp. presented their earnings last week, and the numbers were certainly stellar by any reasonable measure. EPS was up five-fold, from $243 million a year ago to $1.24 billion, or $3.93 per share in the 3rd quarter. Consensus estimates were for about $3.53 per share. The long-term secular trends supporting consistently high fertilizer prices are intact.

After waiting years and years for market demand to catch up to it, Potash Corp. began pushing massive price increases through the channel, and it looks like they’re going to stick. The company sits in the driver’s seat in its industry - it controls over a quarter of global capacity, and it owns half the total capacity set to come online in the next few years. They were able to quadruple profits while total production in the 3rd quarter actually fell by 14% to 1.9 million tonnes.

Stock Drawing a Bottom In Pen

POT shares have rallied strongly from the mid-$60’s level last week, far outpacing the gains of the broad market. Shares of this Secular Trends Portfolio holding are up about 5% in early trading at $83.05

Ryan Barnes

More on this topic (What's this?)
Andrew Snyder Says Potash Corp (POT) Still Has Further to Fall (Contrarian Profits, 10/10/08)
Wedge Pattern Example, Potash Corp (POT) (Stock Trading To Go, 9/12/08)
Potash Corp (POT) (Stocks Today, 11/7/08)
Read more on Potash Corporation of Saskatchewan at Wikinvest
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