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Buy, Sell or Hold: What to Do with Potash Corp.?

by: Horacio Marquez August 04, 2008 | about stocks: POT    

Horacio Marquez

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As the old Wall Street adage says, nobody ever got poor by taking profits.

And Potash Corp. (POT), the world’s largest fertilizer company, is a living case study as to why that’s true.

The Saskatoon, Canada-based Potash posted stellar results for the second quarter. Gross margins and earnings tripled to 68% and $905 million, respectively, from the same quarter last year on the back of huge gains in the prices of potash, phosphate and nitrogen, which in the past 12 months increased more than 160%, 130% and 55%, respectively. And the company raised its earnings outlook by about 30% for the year.

This stellar financial performance came on the back of increased global demand for grains, which drove grain prices to record highs and caused the head of the United Nation’s World Food Programme to warn that soaring food prices are causing a “silent tsunami” of hunger to sweep the globe.

But despite posting superb profits that handily beat earnings estimates and raising the outlook, the stock sold off, together with the rest of the sector. That’s partly because commodity prices have dropped back, causing related stocks to do the same. The stock-price decline, in the case of Potash, also has a company-specific negative component: Workers are threatening to strike at three mines that account for roughly 30% of Potash’s output. Without question, a strike could negatively affect Potash’s output – even as it raises the price of potash globally, helping the company’s rivals in the near-term.

However, the afore-mentioned sell-off in commodities has been driven by several important factors:

  • Short-term momentum players and some institutional investors have moved away from the so-called “ethanol trade,” since electoral uncertainties raise probability that next year’s ethanol subsidies might be reduced or scrapped altogether. This worry also has affected Archer Daniels Midland Co. (ADM), a prime beneficiary.
  • The U.S. dollar has been climbing against both the Japanese yen and the European euro, especially now that Europe has started to slow, a victim of its appreciated currency tight monetary policy. Some emerging economies also tightened their monetary policies to curb inflation. In this environment, commodities as hedge for inflation have lost some appeal, at least for the moment.
  • This slowdown and demand destruction, in part because of higher prices, have also induced oil prices to decline, and that, in turn, has helped reduce overall inflationary pressures – reducing the need for investors to hedge energy with grains and other agricultural commodities.
  • Summer in the United States has not seen extreme temperatures nor hurricanes, so this year’s crop has only been mildly affected by floods, unlike last year’s weather-induced crop losses. Benevolent weather has also helped lower the price of oil.

On the positive side, emerging-market urbanization, and the accompanying consumer boom (all driven by strong growth in real incomes) is alive and well and will continue unabated for the long-term. So, at some point, Potash and its competitors will become a compelling long-term “Buy.” But the uncertainty regarding the U.S. ethanol subsidies, which originally helped fuel the demand for fertilizer, is too difficult to call at this point.

With most investors having captured massive profits in these stocks and with a high probability of seeing next year's capital gains taxes increased, there is a strong incentive to take profits now.

Therefore, I would lock in profits and wait for an opportunity to get back into this stock closer to the year-end. You’ll want a bit more clarity about the prospects for continued ethanol subsidies and lower prices to get back into this stellar company and its main peers in the sector. And stay tuned for news on the Potash strike.

Action to Take: SELL Potash shares right now, and look to buy back in later this year when the outlook is clearer.

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This article has 44 comments:

  •  
    Aug 04 06:46 AM
    At what point should we buy back in, 250/share or 300's/share???
    Reply
  •  
    Aug 04 08:09 AM
    I disagree with the author and agree with croaker1's point. The long and short term prospects for POT are excellent. I would suggest you add to your position on any pullbacks and hold for the long term.
    Reply
  •  
    Aug 04 08:22 AM
    Market timing is a fool's game. Hold on to POT and add at pullbacks. With an earnings growth rate of 40% over the next 3-5 years, at 18x next year's earnings this stock is a steal.
    Reply
  •  
    Aug 04 08:40 AM
    Agflation isn't over. Why sell? To give Money Map clients a buying op in short order? And which party is pushing to end corn based ethanol subsidies? The Republicans, who will need the farm belt votes more than ever? The Democrats who will be making an all out push for alternative energy? The Green Party?
    Reply
  •  
    Aug 04 09:15 AM
    If
    Reply
  •  
    Aug 04 09:16 AM
    If Russian potash mine goes down (growing sink hole) potash prices will jump.
    Reply
  •  
    Aug 04 09:21 AM
    I agree with Horacio to take profits first then re-evaluate. The overall equity climate is very weak due to serious economic dislocation and 'rich' asset prices are at risk no matter the fundamentals which also changes. Those always on buy and hold Warren Buffet style would probably continue to do so as a matter of belief and strategy.
    Reply
  •  
    Aug 04 09:33 AM
    Unless you have something else you KNOW is going to be a better bet.
    POT is a medium to long term great buy.
    Hang on guys good times are a coming :)
    Reply
  •  
    Aug 04 09:43 AM
    The long term outlook for grain is bullish. However, with regard to the near or intermeddiate term, there might just be some headwinds for the sector, though there is the question as to how intense the impact would be. One issue which is alive and somewhat significant is the question of subsidies. Due to failure of the WTO talks, Brazil may launch a case on alcohol (tariffs, and read corn here indirectly) and cotton (subsidies) in the WTO against the US. There is also a great deal of discomfort within the US itself on these alcohol and grain subsidies now that the prices of gasoline and grain have gone up in price astronomically.So, a new administration may be confronted head-on on these issues as it comes into office.

    My take on these is that the subsidies or tariff are not critical anymore for survival or healthy existence of the ag sector. The alcohol issue, the way it has been supported recently, is even misguided and has been harmful overall for global warming and the environment.
    Reply
  •  
    Aug 04 09:54 AM
    You can apply such an analysis to ANY stock, there are uncertainties and positives in all sectors. If thing were clear, investing would be so easy. Show me one stock where the prospect are 100% positive and there are no uncertainties. I already purchased 100shares and if they go down, I will buy more.
    Reply
  •  
    Aug 04 10:00 AM
    Only good/reliable point is to not ONLY own POT in this space. Good luck with the in/out play.
    Reply
  •  
    Aug 04 10:34 AM
    Favorable weather?? I disagree. In the corn belt, that is, Iowa, Illinois, and parts of Indiana, flooding has removed a significant amount of topsoil. Many farmers are extreemly concerned about this years yield and more importantly, next year. I've personally seen pockets of good corn, but the majority of Illinois and Indiana will have well below average yield. Iowa is much worse due to the major flooding there this spring. This means fertilizer... and lots of it...to build the ground back up. So... this year....watch corn and soybean prices. Remember, Ethanol is still being produced, and its not over yet. Then, .... next year... hold on to your fertilizer hat! Demand will outstrip supply by a wide margin. Even longer term,... don't forget..we have the most productive farmland in the world, but its not enough to feed the growing emerging economies. Therefore, POT is a long term hold. Accumulate on any dips. Mosiac, Monsanto, ADM and BG are in the same camp.
    Reply
  •  
    Aug 04 10:38 AM
    There are short term indicators that make me think that today is not the day to get out of POT, especially if you watched it go down this morning. There were more oil workers kidnapped in Nigeria recently. Iran is thumbing its nose at any attempts to stop its nuclear development. Israel is saying (maybe the guy who will take over the Israeli government) that Iran is close to a nuclear breakthrough (i.e. for weapons). There is a tropical storm / hurricane in the Gulf of Mexico which likely will have a slightly deleterious effect on oil production in th Gulf. The factory orders data were great today. All of this indicates possible higher short term oil prices. This usually means that POT will go up. Also commodities often rise in this same scenario. Grains have already been slowing to stopping their recent descent. They may stop at least temporarily due to all of this news. The Fed will likely leave rates unchanged tomorrow. This will again make people want to own gold and oil in the face of higher inflation. All this bodes well for POT in the short term.
    Reply
  •  
    Aug 04 10:39 AM
    Why is this article under the LONG ideas category?
    Reply
  •  
    Aug 04 11:04 AM
    Umm,yeah: No doubt it is going to be a long for the long term. I don't really believe the ethanol mandate will be scrapped. This likely means all of the estimates are close to correct. Also food demand is firmer if anything than oil demand. For instance, in recessions staples stocks are thought to be a good place to put your money. Fertilizers ride on the staples coattails. Also AGU is going to report on Wed. this week. It will likely have great earnings. This shold give the other fertilizer stocks, especially the potash producers, a lift.
    Reply
  •  
    Aug 04 11:07 AM
    I should also mention that there seems to be good support at approximately the 190 level for POT. Since other conditions indicate there may be a short term bounce upward, this support line would tend to reinforce that viewpoint. The variables in the longer term view are to many for me to cover here.
    Reply
  •  
    Aug 04 11:19 AM
    While grains are still sliding a little this morning, Cattle, lean hogs, etc. are all generally rising. All of these animals need grain feed. Their recent chart indicate they are flat to rising. The grains look like they have hit support levels. If the livestock are an indicator, the grains may start an uptrend soon.
    Reply
  •  
    Aug 04 11:40 AM
    Grain prices are tanking badly today - down up tp 4%. Anyone know how much of this is seasonal ?
    Reply
  •  
    Aug 04 11:53 AM
    One should keep in mind when evaluating the potash stocks that POT is bringing loads more potash capacity on line next year. Then it is continuing to expand it capacity through 2012. I have not seem plans beyond that. Other potash companies cannot begin to compete with the expansion of POT.
    Reply
  •  
    Aug 04 12:06 PM
    Well it is looking scarey. POT down 6% today.
    Reply
  •  
    Aug 04 12:10 PM
    All this on this guys story? How many short shares dose this guy have? It's not for growing hair. People need it to grow food so you and your kids dont starve Horacio.
    Reply
  •  
    Aug 04 12:12 PM
    So Penbat you're saying follow Marquez's advice, sell low....be my guest but I don't think I'll follow
    Reply
  •  
    Aug 04 12:17 PM
    Now 7% down. I am in for the long term. I have POT in an Agri mutual fund which is getting hammerred right now. But it is still scarey.
    Reply
  •  
    Aug 04 12:28 PM
    Grain prices and oil prices have tanked badly since I first commented this morning. Obviously this will lead to a downward movement in POT. It still seems likely it will move upward later this week. AGU was listed as one of stockpkr's rocket stocks of the week. POT should act in sympathy. AGU reports earnings on Wed.
    Reply
  •  
    Aug 04 12:28 PM
    Thannagin has the dey words: Balance...
    That old adage not to put your eggs in one basket.
    Reply
  •  
    Aug 04 12:33 PM
    so buy baskets?
    Reply
  •  
    Aug 04 12:42 PM
    Good thing Potash dosn't run there company with a pessimistic attitude, I guess thats how they got to be the world’s largest fertilizer company? Is it time to buy more?
    Reply
  •  
    Aug 04 01:17 PM
    Speaking from experience.. experienced traders sell first and ask next. best time to sell is when everything looks perfect. pot may see 150 before 250. if you don't take a 8% loss, you will take 28, 38 or even 58% loss. because there are very few who can bear such pain. I have seen my trades melt tick by tick to total loss. Prudent thing to do it to limit your loss to some level you are able to absorb. If you just stop watching it, then you may wakeup to see near full loss someday. By the time the new "truth" becomes apparent, the folks who saw this earlier will have long exited. Its like yelling fire at a crowded theater, *after* quietly exiting first. Smart folks watch what others are doing and follow before it becomes obvious to everyone. Who knows the reasons why things happen, but you can be alert, react and stay alive. Also, never argue with the tape, never average down and never catch a falling knife.
    There's always another bus coming by, so never chase, because if you are run over, it's game over. No principal, no more trading.
    Reply
  •  
    Aug 04 01:18 PM
    almost every time there was a big decrease in either POT or MOS there was a following correction on the next day.
    Nevertheless the volatility of these stocks is just scarry. POT is a 55-60 bn company... it shouldn't be that volatile.
    Reply
  •  
    Aug 04 02:13 PM
    With the state of the world economy maybe Seking Apha could put these guys on saying something good about a 1 or 2 star company instead of bashing the 4 and 5 star company's. If the economy crash's due to guy's like Horacio he may wish he had some fertilizerer to get his carrots to grow. Try telling me what stock to buy not which 5 star company to dump and take profits, I think that gose for any stock thanks to guys like you I guess I better. Sounds like a gravy job. Nice work Sherlock.
    Reply
  •  
    Aug 04 02:33 PM
    Excellent post.

    With corn prices down over $2/bushel in less than two months, it's unreasonable to expect additonal potash prices will stick after quadrupeling to $1000/ton in two years.

    '09 earnings will be close to 100% greater than full year '08 earnings, but if investors perceive the pricing cycle has peaked, the stock's long advance is over.

    I believe rallies in POT should be sold.
    Reply
  •  
    Aug 04 03:03 PM
    Keeping what I have and starting over where I was a year ago with POT. Have taken three healthy profits buying dips and selling peaks. Today's crash is a big dip, so...
    Reply
  •  
    Aug 04 03:29 PM
    Want to get some fertilizer action without the huge PE of POT? Try YARA International (YARIY.PK). It's fwd PE is only 9, but it too is reeling in triple digit increases in prices that are in line with what POT is pulling down. But they are less known, so they don't get all the attention that POT gets. Also, last time I checked there were huge barriers of entry in this industry for new players, and even with ethanol demand in the US potentially going down, I don't see the world using less corn, soy beans, and other crops. Lot's more hungry mouths to feed around the world. Anyone remember that Asia is seeing huge inflation due in large part to increasing rice prices?
    Reply
  •  
    Aug 04 03:35 PM
    I too am voting for a correction tomorrow and Wed. POT is down 23 or so today. It looks like it might be a good time to buy. Of course, the opposite may also be true.
    Reply
  •  
    Aug 04 03:41 PM
    POT P/E is only 27 now, after the price decrease and the last earnings report. It's FPE is 8.5. How is YARA International better? POT has a lot more growth in store.
    Reply
  •  
    Aug 04 04:07 PM
    What is more likely to happen next $150 or $200?
    What is also more likely $100 or $300?
    I think it's fairly obvious. The upside to the current share price greatly outweight the down. I would personally buy now and buy again in a frenzy if the share price gets in the $150's. Reality always outweights speculation. Period. long, long, long...
    Reply
  •  
    Aug 04 04:29 PM
    If you bought POT prior to July 2007, you would see a bigger return from POT. However, if you bought any time after that, the YARIY return has pretty much outperformed POT by about 50%. It's hard to tell because YARIY is on a foreign exchange so you don't get all the financials wrapped up nicely on some screens, but my guess is their growth is outpacing POT, or at least their return (not counting dividends) has accelerated since July 2007 compared to POT. Also, by my rough calculations converting NOK to US$ YARA had 2007 revenues equivalent to 11.2b, whereas POT had 6.7b. YARIY also returns roughly a 3-4% dividend yield, whereas POT's about 0.2%. So how does POT have a lot more growth in store when YARIY is bigger, has bigger revenues, has a larger dividend, and has been outstripping POT in price appreciation?
    Reply
  •  
    Aug 04 04:51 PM
    I think we just have strong volatility here but I see no reason why the long term bull market should be damaged. There are specific reasons why agri and oil commodities have fallen today such no expected immanent hurricane damage and crop yields being good for now.
    Reply
  •  
    Aug 04 11:44 PM
    Anything equities right now is damaged. The market is completely upside down and irrational. This is reflected in how Financials have become market leaders and the Energy sector a laggard. The fundamentals show completely the opposite. This must be one of those summer trading days where the heat must have gotten into people's head. There is simply no explanation to how stocks like Merril "and the rest of the gang" are able to sustain current levels, while POT or FCX are experiencing brutal sell-offs. This can mean nothing more than a set-up for more of the same we had all year: Sell-offs in the Financials and run-ups in anything commodities. I figure late August, early September, might be a good time to see those rotations again. I do not believe though that commodities will make higher highs in the near to long term, unless the Feds come to their senses (probably some months after the election). Yes, we had run-ups in commodities last summer (especially after sell-offs), but we were not as negative on econonmic growth as we are this time around. POT is just not a great play right now. It is unfortunate, because spending a lot of time studying this company is guaranteed to turn anyone into a bull.
    Reply
  •  
    Aug 05 12:46 AM
    If the USA continues to poduce 10B bushells of corn and plant over 70M acres per year, you need the POT. I don't see farmers planting less if grain prices back off somewhat. They have to cover huge fixed costs (land, buildings, equipment). Meanwhile, lower oil increases farmers' profits. (Lower UNG increases CF and TRA profits.) Oil and Ag went in tandem Monday, but think this through. Ag products are not a fiat currency, as gold and maybe oil are. I'm looking at calls, not puts. Long Ag, obviously.
    Reply
  •  
    Aug 05 10:50 AM
    lower oil prices = lower demand for oil. Lower demand = lower consumer ability to pay high prices = global slowdown = less demand for commodities = this sharp selloff. PERIOD

    When the hedge funds decide to change this thesis

    things will change, who knows when that will happen, my guess end of August, why thats when Nat Gas usually rallies, I know that makes no sense.

    But, look at the charts, UNG fell off a cliff and everything followed COAL, Metals, Ag, Oil, Steel, even though some benefit from the fall of others.

    I know this makes no sense, but everyday I watch my portfolio bleed: Long oil, Ag, Steel and Coal
    Reply
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