In the early days of 2014 we are seeing both analysts and retail investors alike seeking to sift through 2013's losers for possible diamonds in the rough. This has resulted in some names seeing strength in their shares but more often than not price targets being raised along with analysts' opinions on companies.
Now for the most part we think that most of these upgrades are wasted as the underlying businesses and industries which these companies are in are undergoing major transformations. Some of the opinions may work out simply because prices are so depressed, but we believe that true turnarounds are much further down the road than many believe. With that said we have found a number of names which have grabbed our attention with their recent performance and analyst notes.
Chart of the Day:
Coffee has been a hated commodity asset class for years now but this year it is finally showing signs of life. We have been watching the $120 level to see if the recent momentum would take coffee through that resistance level but it was not to be. We suspect that the bulls will regroup and try again later as they failed numerous times recently.
Commodity prices this morning are as follows:
- Gold: $1,239.10/ounce, down by $6.30/ounce
- Silver: $20.165/ounce, down by $0.117/ounce
- Oil: $94.43/barrel, up by $1.84/barrel
- RBOB Gas: $2.6274/gallon, up by $0.005/gallon
- Natural Gas: $4.377/MMbtu, up by $0.008/MMbtu
- Copper: $3.359/pound, up by $0.023/pound
- Platinum: $1,426.80/ounce, down by $7.00/ounce
By now everyone knows the story here; there have been two potash cartels for as long as anyone can remember and suddenly in 2013 the cartel based in Eastern Europe fell apart when one of its two members surprisingly exited. The entire industry has been volatile since then as prices have fallen and many believe that they will continue to fall with competition between the two Eurasian producers.
The good news is that near the end of 2013 it appeared that Russian oligarchs were willing to step in and recreate the Belarus Potash Company to re-stabilize the industry and create pricing power once again.
We like the 'Big Three' in the potash sector as viable investment options, but Potash Corp. of Saskatchewan possesses the keys to the industry and is breaking out right now, thus this would be our recommendation for long-term investors. Mosaic is a close second.
Source: Yahoo Finance
Lately we have noticed shares in Potash Corporation of Saskatchewan (POT) moving higher, and strongly so. This follows news that the potash price fell to fresh multi-year lows that date back to 2010. The company also laid off nearly 600 workers as they work to adjust production and keep prices steady through the cartel they are a member of, Canpotex.
Another member of Canpotex, Mosaic (MOS), has also been strong as it appears that the news flow is turning positive. We also suspect that there are some buyers reentering positions they exited to window dress their fund portfolios near the end of 2013.
Outside of the North American cartel is Intrepid Potash (IPI), a company which had its IPO during the potash bull market and is a high cost producer. This name has been quite volatile since the break-up of Belarus Potash Company was announced and it is due mainly to the fact that Intrepid has smaller margins and also a smaller balance sheet than its much larger North American rivals that make up Canpotex. Intrepid announced today that it is undertaking operating cost savings initiatives (see press release here) that the company believes will save it $15 million per year and result in a reduction of 7% of the workforce. This appears to be a trend in the industry and we would expect to see further cuts to balance out supply and demand as the cartel situation is solved.
Intrepid Potash would not be our choice in the potash sector and contrary to popular belief it is not a buyout target. That rumor creeps up from time to time, but makes little sense in our opinion.
Source: Yahoo Finance
Potash has been one of the subsectors within the overall commodity complex which it seems has always been a "next year play" and burned us before. We are not overly bullish of the sector but do think that there is a nice risk/reward in playing the names for a potential news flow trade. That news flow could be that Russia takes a more active role in the potash business or that the rumors are true and the Belarus Potash Company is reformed to jointly market the potash production from Eastern Europe.
Analysts have perked up to these names in recent months as the world economy has shown signs of improved growth and the emerging markets seem to be recovering from their downturn. Both commodities make for intriguing plays, however unless one is getting involved in a low cost producer, such as Peabody Energy (BTU) in the coal sector - and we are hesitant to take on even that risk, we think the only way to invest in either commodity is via a diversified mining name. So although we are not fans of the high cost of Cliffs Natural Resources' (CLF) production, we do recognize that it does have exposure to both iron ore and coal and could see the most benefit as its margins would increase by a greater amount than low cost competitors (on a percentage basis).
We would use the major commodity producers to gain exposure to some of these sectors and think many of our readers will choose the conservative route as well, but speculators will appreciate the volatility offered by some of these beaten down names.