Potash Corporation of Saskatchewan (POT) is bouncing off yearly lows while the rest of the market is at all time highs. The main cause for Potash's struggle has been weakness in the agriculture sector as a whole, oversupplies in ag commodities, and increased supply of raw potash. However, due to the company's cheap valuation, favorable technicals, and signs of a bottoming out of agriculture prices make me bullish on the stock.
Recovery of agricultural commodity prices and increased farming activity as a byproduct of this are the primary catalysts for Potash's stock. As seen in the chart below, Potash prices are near 2010 lows at $390 per ton. Many agricultural commodities are trading at extremely oversold levels such as wheat, coffee, cotton, and corn. This has disincentivized farmers to increase production and has hurt the company recently. However, food demand continues to grow with population growth and the increased affordability of meat products by residents of emerging market nations. In addition the increased supply from Belarus and Russian based competition is not large or reliable enough to keep Potash prices near five year lows.
The financials for Potash indicate buying value. Even with disappointing earnings and sales, Potash still has a return on investment capital at 15.7% and a return on equity of over 22%. Potash's 0.34 debt/equity ratio is manageable profitability remains high with a 28% profit margin. Analysts expect growth to continue to be negative, so any material improvement in the company's prospects will be a bullish surprise. Also, with the rest of the equity market largely overvalued, the stock's current P/E ratio of 12 is reasonable.
Technically, the outlook is also bullish. The stock is over 25% below 52 week highs and momentum indicators such as the MAC-D, full stochastics, along with Nomadic's proprietary momentum measurements have all trigger bullish upon yesterdays breakout. Potash also broke out of a descending wedge dating back to May 2013.
Due to my expectations of recovery within the agricultural industry and Potash's depressed stock price, I think the company has a lot of upside potential. Agricultural commodities have little correlation with equity markets as whole, so Potash can rise even in the face of an overall market decline.