I Love Fertilizer Stocks, but...

 I fear speculators more.

I have noticed a few things over the years... first, analysts who are often wrong are always conservative. They protect their hides. They rarely make calls ahead of the curve. And rarely do they make calls the week of earnings. On Tuesday, we had a downgrade of Mosaic by Citibank a few days before earnings. This is very curious and does not fit the pattern of ultra conservative analysts.

• Shares of fertilizer company Mosaic Co. fell Tuesday after a Citi Investment Research analyst said there's a chance that fiscal third-quarter profit may miss Wall Street expectations.
• Citi's Brian Yu, who expects earnings of 83 cents for the quarter, says there's a chance Mosaic's results will miss the average estimate of analysts polled by Thomson Financial. Analysts currently expect 95 cents in earnings for the quarter.
• Yu says phosphate profit will likely decline from the year-ago quarter, on seasonally lower shipments and higher ammonia and sulfur input costs.

Now, nothing is foolproof or 100%, but usually an analyst will stick out their neck like that they know "something". Now let me be clear - the long term is bright, as bright as any company in the stock universe. Let me also say I believe all input price increases will be passed on to customers.

But let me also be clear that as each quarter passes, more and more people who know little about fertilizer pile into the space because it's hot and sexy. So the risk increases massively. Especially around earnings season; akin to solar in the latter part of 2007. So purely as a risk aversion I am going to cut back my exposure in Potash and Mosaic going into this Friday's earnings. Not because of anything to do with the fundamentals or "natural gas input pressure," but because I believe the probability exists that many people who piled into these stocks the past 3 months have a propensity to panic over any whiff of perceived (not real) bad news. So we might get a buying opportunity. This actually happened last quarter when the "selloff due to natural gas costs" lasted all of a few hours.

Further, I am breaking multiple rules by loading up on this stock (Mosaic) ahead of earnings. First, I hate earnings because people overreact, so I try to limit risk (giving up potential upside) by lowering exposure on almost any stock going into earnings. Second, the ag stocks are not acting well of late - have to respect that. Third, Mosaic is trading below 50 day moving average (could change by Friday). Fourth, the above-mentioned "analyst rule."

Again, aside from the stock you need to know the herd you trade with. I know the herd that has now moved into fertilizer stocks. They shoot and ask questions later. This is the same herd that decimated solar stocks to the tune of 60%+ losses in the past few months and the same herd which shot Apple (AAPL) to the tune of 40% after stellar earnings because the guidance was "not enough" despite always conservative guidance that they smash regularly.

The same herd killed Crocs; the same herd  killed Google (GOOG), the same herd... well you get the idea...So I am going to spend the next day reducing exposure (I just began the past 15 minutes) and I'll let the smoke clear... I might miss a big move up, but I need to put personal beliefs about the long term fundamentals aside and protect capital. I took a big hit in Apple, in a stock that was unfairly beaten down. But there is no "fair" in the stock market - just emotional reactions and lots of momentum traders who could care less about fundamentals.

Again it's not the news, it's the reaction to the news - good news is already baked into this sector - see Monsanto.. fantastic results, but a sell off. So for a temporary respite going into Mosaic's Friday earnings, I am changing course and will reduce exposure. I expect tremendous numbers Friday and later in the month with Potash (POT). But I could also make a very easy case that someone will find something to complain about and say "the story is ending", and cause a sell off. So its a bipolar outcome - it could go either way. And that is gambling, not investing.

Unfortunately this is the market we are in, in this era - where the long run means "next week", and shooting first and asking questions later in is the norm. Earnings season is a minefield. So I don't want to give up weeks of good returns by an overreaction by the "herd". I Just want to make that clear since I have been, am, and will continue to be one of the biggest proponent of (especially potash based) fertilizer stocks, and the agriculture trade in general.

This is a very short term move to simply reduce risk to (potential) shareholders. It does not mean the stocks cannot gap up and run 25% after an incredible earnings report. But it is not worth the risk to me to give back a lot of return by being overweight going into earnings. I'd miss some return but losses are harder to make up than "lost opportunities". We'll re-assess after we see the reaction to the news Friday. But I will be back, in scale, soon enough - even if it at higher prices post earnings. A temporary respite - until then I play with such lovelies as homebuilders ;) [Apr 1: A Kool Aid Trade - Adding Homebuilder Exposure with Lennar]

Disclosure: Long Mosaic, Potash, Lennar, Apple, Google in fund; long Mosaic in personal account

Comments

[User 33555]

"I am breaking multiple rules by loading up on this stock (Mosaic) ahead of earnings."
" So purely as a risk aversion I am going to cut back my exposure in Potash and Mosaic going into this Friday's earnings."

I understand! It's like a Long & a Short at the same time. Kinda like a neutral hedge. Very clever. Can't win or lose. Very clever. The only thing that happens is you pay commissions on your trades. Hmmmm...,I'll figure out this strategy someday.

[mark1]

your logic is very weak --
your heard mentality thoery is not proper

stocks go down or up
on instiutional power not some retail community
thats owns 100 shares etc --aaple went down because
they guided weak it dererves to go down --

analysts have failed in making commentary before the quarter
in the following companies fslr, bidu, ma, rimm , isrg -- the quarter came out brilliant-- ofcourse if the guidance
is weak its different story ...

do you see fertlizers prices coming down ??

[G'Money]

The P/E is scary, especially if you look at the 5 year historical trend and it does look to be on the verge of doing something. However, future projections are impressive as is their potential phenomenal growth.

Speculators or not, they will keep coming back as long as their positive news fed to them and it looks like Potash may be able to provide it. We'll see.

[Real Grit]

Have faith after you have done your home work. Buy on every big dip and have a final price target and you will be able to sleep like a baby.

[startouch]

Doesn't this constant in and out of a stock (to protect your gains or cut your losses) put you somewhat in the league of the 'day traders' you so loathe? I am with 'Real Grit'. Also for some of us poor 'retail investors' there are tax consequences to consider

[User 153029]

I think you might do better to invest in lesser known names. Every company you mention is in the spotlight, covered by dozens of analysts etc. That is not where you find value.

Ed Roche - Freedom Mountain Investments

[User 158294]

You do have a very good point when you said I'd miss some return but losses are harder to make up than "lost opportunities". i learned that trading into earnings is very risky, i got hammered with DECK, and CROCS, made the same mistake one week after the other, after having a fantastic quarter of 8.61% return, i wind up with just 3.1%. as much as i like fertiliser stocks, i would rather wait after earnings, there is no catalyst to move the stock after that, so we are going to have very good buying oportunities.

William A. Sosa
WWH, ASSET MANAGEMENT GROUP, LLC

[BigDogBlog]

Trader Mark's comments on the markets reaction to Monsanto after there solid quarter is something to think about, but compare the future EPS for each company and Mosaic will jump higher with similar reults and will plunge if misses by a penney. Maybe the best answer is to the keep the same position or lower by a little for long term results.

[MDogg44]

What were the price per ton of DAP/MAP/POT numbers MR. Yu used in his analysis? Latest DAP prices are at $1100/ton and Potash prices at $600 to $800 /ton.There is a big demand problem right now.Fertilizer producers are running at close to maximum rates and simply can't supply enough. That problem will exist for some time to come.

[TraderMark]

@User3355, thankfully I am sarcastic myself so I 'get your point' - seriously with commissions so low in this world, going to cash for the short term is not a high price to pay.

@mark1, you named 5 stocks that beat analysts and went up, I can name you 50 that did the opposite. The idea is the probability is 50/50. It can go up, or down. Depending on what the herd is feeling that day.

@G'Money - I don't think the PE is scary at all - you cannot look at trailing earnings - analysts have been wrong for 12 months+ on their estimates and my belief is they continue to be wrong. POT and MOS will see even more increases in their 08 and 09 numbers in my opinion... especially 09.

@startouch - I have an online friend who didnt want to sell Suntech Power in the $80s a few months back due to "taxes". The stock went to $30 within a few months. Taxes are an issue, but taxes signify you are making money. Better than the opposite. I have unfortunate,y been changing my short term view because the price action has been all over the place lately and my short term weightings are based on technical action. With hedge funds running almost daily in and out of commodities to early cycle financials/homebuilder... and back, reversing course every 48 horus it is wrecking havoc with my strategy. Also to be clear I am never totally out of a position that I believe in like these names - I am simply weighing it more or less. I always keep a core, and trade a partial position.

@User 153029 - there are really 3 names to play potash and the 3rd has a retail component. So there are 2 pure play names. So there are really not many choices.

@ William S - I am sure I will get criticized for my strategy if the stocks go up. The point is not if the stock goes up or down but a risk aversion going into earnings. I've been heavily weighted in these stocks for nearly a year now. And I will continue to be for a few more years to come I am sure. But... the herd reacts so arbitrarily around earnings, and you can instantly be down 15-20% for no good reason. That's my main point with this post. Fundamentals do not justify a sell off but the coal stocks just dropped 25-30% across the board for no good reason as well. Hedge fund money and their "pick of the day" seems to determine prices more nowadays than fundamentals.

@BigDog - I am frankly getting sick to see MON compared to MOS/POT. I've heard in the press 4x in the past 48 hours that MON is a fertilizer company. MON is a quality name but completely different. I've been in the fertilier companies because of better earnings leverage and frankly they have been much cheaper than MON this entire cycle


@MDogg - I think analysts are and will continue to be behind the curve. The thing they bring out every quarter is natural gas pricing and how thats going to eat into margins - I think this will be the 3rd quarter in a row they bring out the same excuse... probably to get their clients in at lower prices.

Thanks for all your comments and once the market settles down I hope to simply sit and ride these tremendous opportunities. Until then, I've been moving in and out a lot more than I'd prefer simply because these stocks are quite volatile - but they provide great opportunities for traders and long term holders in my opinion.

[thaipo]

You contradicated yourself in this article. First you said, "I am going to cut back my exposure in Potash and Mosaic going into this Friday's earnings." Then you say, "I am breaking multiple rules by loading up on this stock (Mosaic) ahead of earnings." Which is it?

[TraderMark]

Hi thaipo, I had loaded up in the past week as the stock dipped to the mid 90s. Then I decided yesterday by doing so I broke a lot of my rules i.e. load up on ANY stock (no matter how much I love the fundamentals) going into earnings along with the comments mentioned above. That said with 2 analysts going bonkers today the day before earnings, and the stock bouncing after closing below the 50 day moving average (which is bearish) yesterday, obviously the stock is moving away from me.

Anyhow the action has been nothing if not interesting... yesterday's close below the 50 day should of called for a selloff based on technicals. Luckily the analysts came in to save the day. I find it ironic that POT has not shown the same weakness in the chart as MOS... perhaps pure manipulation for all we will ever know.