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Daily Data: Potash Corp. of Saskatchewan, Inc. (POT)

Potash recently reported and missed earnings on October 25th. The EPS number posted was 0.74 vs. the 0.75 that analysts expected. These third quarter earnings have been the fifth consecutive report that Potash has missed estimates. Mind you, the company barely missed expectations, but still, a miss is a miss. Despite the recent sell-off in the stock, fundamentally Potash still looks overvalued. The current P/E is 14.34, while next year's EPS growth rate is only 12.29%, and the five-year growth rate is just 4.48%. Based on these growth rates, POT is trading at a 1.16 one-year PEG ratio, and a 3.20 five-year PEG. Technically, this stock looks terrible on a three-month daily, but on a nine-month, POT looks like it has hit a bottom around $37-$38. I decided to look at this stock and other fertilizer names because I remember from last year that these stocks are seasonally strong in the winter months (the data was bullish last year, and our positions performed well). Thus, I decided to look at the 10-year option expiration date returns from November to January for POT (and other ag-related stocks/ETFs).

Above, you can see that POT has performed well during this time frame. The stock has posted positive returns during these winter months for the past eight years. In fact, POT has posted relatively better returns in recent years. With a worst return of -8% only seen during the 2001-2002 sell-off, the stock has held up very well. I definitely suggest a bull put spread on POT, especially because the position has the opportunity to expire worthless, as the company reports earnings next on January 28th. Even though if you want to play a longer duration position, I think that's fine. Since analysts expect such a small number, POT has a lot of room to surprise.

Based on the data above, I suggest the following trade.

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Option Trade: POT - Sell Jan'18 35/33.33 put spread (Bull Put Spread)

(Sell 35 Put/Buy 33.33 Put)

Size - 5% of Option Spread Portfolio Size = 3 spreads)

Entry: Sell Limit: 0.20

Stop Loss: 0.42

Exit Price: 0.00

Max Return: 13.60%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Daily Data: CF Industries Holdings, Inc. (CF)

CF Industries is an Oxen Group favorite among fertilizer stocks. The stock usually has the great value when compared to POT, MOS, or AGU. If you look at earnings posted over the past 12 quarters (three years), you can see the trend is up.

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CF just reported earnings on November 5th of 5.85, which beat estimates of 5.70. While CF did increase earnings YoY, analysts forecast a decline in EPS of -5.74% for next year, and just 1.75% YoY for the next five years. These types of predictions do not bode well for the stock. However, If we're looking at CF just in terms of holding into the very start of next year, we may not necessarily have to worry about next year's full year earnings. The November to January option expiration date returns since inception are shown below.

Above, you can see that CF has performed remarkably well during this time frame. CF has never posted a negative return during this time frame. Last year, we traded CF on a slightly different time frame and positive returns were realized. Technically, I like the stock right now as CF remains in an upward channel. The stock has also performed well, rebounding for two consecutive days with the market. If the market can trend sideways to up into January, I think CF will post another year of positive gains during this time frame. Note, I'm disregarding the negative EPS predictions for next year because the time frame we're looking at barely enters next year.

Based on the data above, I suggest the following trade.

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Option Trade: CF - Sell Jan'18 190/185 put spread (Bull Put Spread)

(Sell 190 Put/Buy 185 Put)

Size - 5% of Option Spread Portfolio Size = 1 spread)

Entry: Sell Limit: 0.95

Stop Loss: 2.10

Exit Price: 0.00

Max Return: 23.45%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Daily Data: Monsanto Co. (MON)

Monsato prides itself on the product "Round-Up," a weed killer, vs. potash fertilizers like POT and CF. Monsanto is also known for selling genetically mutated seeds that enhance crop growth, but do not yield seeds to be used again. As unpopular as its products are among environmentalists, this company makes a lot of sales ($13.48 billion TTM).

In terms of earnings, MON just missed already low EPS estimates on October 3rd (-0.44 vs. -0.43). However, MON has been expected to report a seasonally weak quarter in the third part of the year for as far back as I can see.

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The P/E is 23.67, while next year's EPS growth rate is only 13.77%, and the five-year growth rate is 10.18%. This means that investors may be paying too much for earnings unless the company can surprise in the future. I imagine the company will beat in one or two quarters of next year and miss by a small margin, causing earnings to grow by a little more than 13.77%. Despite the current P/E being 1.71x larger than next year's earnings, it is relatively better than POT and CF since their growth rates next year are 12.29% and -5.74%, respectively. Technically, I like MON because it remains in an upward channel between $85-$95, and stock continues to trade above its 20/50/200 SMAs. The 10-year November to January option expiration date returns are shown below.

Above, you can see that of all the data presented in this article, MON's is the best. The data shows the longest duration of positive returns during this period, coupled with the highest average return. Seasonality may definitely be at play here. It's interesting that a stock can do so well when earnings are expected to be so small during this time of year. Based on the information above, I suggest the following trade.

(click to enlarge)

Option Trade: MON - Sell Jan'18 80/77.50 put spread (Bull Put Spread)

(Sell 80 Put/Buy 77.50 Put)

Size - 10% of Option Spread Portfolio Size = 4 spreads)

Entry: Sell Limit: 0.26

Stop Loss: 0.56

Exit Price: 0.00

Max Return: 11.60%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Daily Data: Market Vectors Agribusiness ETF (MOO)

After talking about three well known ag stocks, it's important for us to look at the main ag ETF, MOO. Unfortunately, the data shown below goes back only four years due to when the ETF was created.

Although the number of returns is small, the point still gets across that ag stocks as a sector have performed well during the November to January option expiration time frame. As we move further into the winter, I will continue to post data, as I know these stocks perform well past January into March.

Source: How To Trade Agriculture And Fertilizer Stocks Through January