What, crap? Perhaps Potash (POT) has had a lackluster 2012 (returning just 4% year-to-date, versus 11% in the S&P 500), but large gains may lie just around the corner. The other day I wrote an article detailing why I was bullish the agriculture sector, now I'm writing more specifically on why I am bullish this particular fertilizer giant.
Potash is a non-metallic mining company specializing in the production of potash and other fertilizers. They supply farmers with the needed chemicals to enhance their crop growth, and therefore are effected by crop demand. Though it has been trading in a tight range lately, I feel as though it is one of the very few stocks still left "on sale" this year. While many will argue that the price action is lousy and that it is "dead money," I still think it's a bargain right now, even if further downside lies ahead.
Potash has a 52-week range of $38.42 - $62.60, and as of March 13th, trades at just under $43. In early March, Potash broke through the support of its 50-day simple moving average, but has since seemed to find a bottom near $42.50. Should this support fail, we will see an even further drop to around $41. The RSI, an indicator that measures overbought and oversold levels for stocks (70 being overbought and 30 being oversold), reads at a mere 36, indicating a nearly oversold condition. For a medium to long term investor, I see a lot of upside potential for Potash. Below is a chart displaying the 50-day and 200-day simple moving average as well as the RSI.
Click image to enlarge.
As I stated above, momentum is clearly not on Potash's side. However, that does not mean that, at these levels, accumulating the stock is not warranted. At just $4 above its 52-week low, I feel comfortable building a position. With a PE ratio just over 12, Potash is cheap on a fundamental basis. Also, a quarterly dividend of $.14 per share is paid, and although this represents just a 1.31% yield, using covered calls against the position would be another effective way to collect income should Potash continue to decline.
Expanding on the concept of using covered calls, today you could purchase Potash for $43 per share, thus 100 shares will cost you $4300. Immediately turning around and selling the April 45 call will net you $76 in premium. If Potash closes at $45 by the expiration date, or in about 38 days, this will represent a return of $276, or 6.5%.
While this is not a home run return by any means, it is a safer way to collect returns while waiting for capital appreciation. You could always use a further dated option for higher premium, however I prefer to use front month expirations for two reasons. First, time decay moves much more rapidly than further dated options, and second, if your stock position rapidly increases, one will have their gain limited to the strike price of the long dated short call.
While a covered call option is not necessary, it will provide a boost to the rather small dividend in the event Potash fails to generate sufficient returns. While Potash is not currently breaking out or in a strong uptrend, I feel that these price levels are safe to begin building a position, perhaps 1/4 of your desired position.