I have recently been focusing on some larger global macro trends to help over-compensate my fund for the lackluster European markets with its significant debt issues and the constant fret over the US debt ceiling. In my attempt to diversify, I identified one trend that is thousands of years old and still holds true to this day.
One of the most basic needs of all human beings is food. People have to eat, and in order for people to eat they need to grow crops. The investment process seems simple enough. While the global population grows at an exponential rate, Al Gore rants and raves about overpopulation and the Chinese have a billion people to feed; the opportunity is apparent.
One key flaw to the Chinese expansion, in this respect, is that the Chinese people simply can’t grow all the corn and wheat they require to sufficiently feed the people. Just recently China purchased more corn for delivery in August than we had estimated for an entire year. Naturally, these billion people need to eat, and what they eat needs to be fertilized.
The solution into taking advantage of this long-term trend is Potash (POT). Potash has been in business long enough to realize the opportunities that lay ahead of itself. Just listen to the optimism and excitement over the 2011 Q1 conference call here.
Revenue at Potash has grown by 28.6% from last year as it has successfully serviced the global need for fertilizers. The industry average ROE is 22.6% for Q1 of 2011 while Potash is significantly higher at 29%. Potash is due for Q2 earnings at the end of July and I expect an equally exceptional quarter. Currently Potash is trading a bit of a premium at around a P/E of 25 while the industry average is around 20.5. Although it may be a little rich at the moment, I believe the earnings increase over the long term will more than justify the slight premium you would currently be paying.
Also, to compensate for the slight premium, Potash offers a small dividend of $0.28/year that, around these prices, is a yield of about 0.5%. Potash has a correlation of approximately 27% with the SP500. This low correlation will allow for plenty of price appreciation regardless of how influenced the overall market is by European worries and the incompetence of our government.
Recently Mosaic (MOS) and Potash have been squabbling over some miniscule nonsense in the Canadian courts. The good news is that Mosaic has been ordered by the Canadian courts to continue to supply and deliver to Potash.
Disclosure: I am long POT.
