Ag Stocks Could Have Steep Pullbacks

The fundamental story behind agriculture is powerful, no doubt, and I agree with what our firm's own Michael Pento had to say just the other day in response to the notion that there is somehow a bubble in agriculture.

That said, this pullback could be pretty darned steep.

Beginning yesterday, of course, the leading agriculture names (Monsanto (MON), Potash (POT), Mosaic (MOS) and others) started pulling back. Now would be a good time for investors to check themselves, step back and just look at the reality of just one of these charts, which is representative of many names in this group at the moment:

3-year chart of Potash

(chart courtesy of www.stockcharts.com)

While it's true that within a bull market there will be corrections along the way, these stocks are due for one that could be nasty enough to call the entire agriculture bull market into question.

Fundamentally, there are few holes to shoot in the long-term agriculture story, but in the short run technically, things could get messy for a bit.

What would be best, in fact, would be a sharp, frightening pullback; if in a few days or weeks the headlines have changed from food riots to stories about how the ag bubble has burst, that would likely be the time to think of piling back in.

In the meantime, those with big gains in these stocks can look to take a few chips off the table, even in the face of today's pullback. Those looking to get into this space should either be waiting for more downside or nibbling slowly.

The story is intact, the stocks are just stretched.

Disclosure: Long MON, POT and MOS.

Comments

[tooncat]

Why would you publish a ridiculous article like this in this market? Any stock could and will have pullbacks. But to state that an industry that is operating in record earnings territory is on the verge of what you are almost saying is a collapse is just irresponsible and probably should be checked out by the SEC. Your historical charts don't even apply in this new operating territory. Rip them up.

[fodi MD.]

Everyone knows stocks with very strong fundamentals dont go always go up. The moon could be made of cream cheese. Is your middle name buffalo Chip?

[athenian]

What is it with you guys? I think this is the second time lately you've beaten this drum. Are you short these stocks?

[RegTrader]

Exactly! Record earnings and very impressive future guidance goes very much against what you say. Agree there can be some pull backs, but absolutely will not be 'pretty darned steep'. What? are you trying to cause panic in the market for some personal interests?!!
Watch POT climb to $210 within the next 2 weeks after this short breather. Long would be as speculated by JPMorgan and RBC Capital in the $275 to $300 range.

[Amidwesternneighbor]

I have one foot in each camp on this. I'm *very* bullish on the space. I wouldn't want to be long specific crops, since I see the likelihood of some rotation...but ag in general is not going away - the story is more about hungry people in developing countries now being able to afford more and better food. The fertilizer (potash) and equipment stories remain intact for the foreseeable future.

With that said...it is true that it has been a remarkable run thus far. And there must be a noticeable pullback at points along the way, due to profit-taking if nothing else. In this case, the fundies continue to shine, though. I'm left wondering if we are just fearful, since we don't see a change in the story.

What to do? If you are up a good way, there's nothing wrong with taking profits on part of your position. I would not sell all. Just take some off, and pile back in on pullbacks. Since the fundies remain not only sound, but solidly so, I would not wait for huge pullbacks. Calculate a point where you can take some profit and where you can come back in at a good basis. And focus a bit more on the technicals at this time, with the fundies being sound. I.e. trade your
partial position around the resistance and support levels.

I don't know that I've said anything new here. Just good reminders for all of us.

[Greenieeee]

I think I read a different article...why do you think he's short? Here's what I see:

"The story is intact, the stocks are just stretched."

Disclosure: Long MON, POT and MOS.

...and the article he links to at the beggining is like a total cheearleader piece for ag.

How is it you accuse them of being shorts?

[mydickupourass]

i hate people like you, we all have looked at the chart. You ar just a fsob.

[Success]

I agree with everyone. A pull back is inevitable in every stock. With all the news on food shortages and riots you cannot call this a bubble. I listen to the confrence call, and my expectations are high. So everyone please do not be fooled to let this one go this early. Just last month the price of potash double from last year. Not to mention, Russia has just increase there potash prices to 1000 starting June 1. The Ceo of Potash Corp said that in the short term future that there prices will indeed be around 1000. So what bubble. Watch CNBC and every 10 min there is news about food shortages. This is not speculations because the Governments of Nations have second this motion. Buy ag stocks and every so often sell and then get back in.

[sb-tiger]

If stocks go parabloic SELL. We have seen this over and over again.

[Lion Heart]

Short it so I can buy some more at a discount.

[virtualdream]

I also think POT will go to mid to low 300's long term. I think POT had a nice 20 point pull back the last two days, as some of the big investors took profits. This is not unusual when a stock hits it's all time high and esp. prior to earning announcements. However, for POT there were no major surprises here. All the major banks here in Canada are also suggesting 250 to 300 points (TD Bank and RBC). What I would like to see right now for POT is a split of 2 or 3 to 1, I think that would bring more investors to the table that can't get in on this stock because it is trading high. One thing POT's chart shows is a steady growth stock ... I just wish I knew about this one back in 2003 or had bought BIDU (now WAY overvalued) when it was trading at $26/share.

[Success]

Sb- Tiger you can stay out of the stock, but the bull run will last for at least two years.

[Success]

I second that motion virtual dream. I bought feb 1st @ 155, and a split will be a hell of a deal. Good luck Pot traders, make money, and dont fall victim to shorts.

[Rob L]

All you people who say that these Ag stocks aren't expensive are fooling yourselves. I own MOS and in fact I just bought more yesterday on the pullback, BUT I understand, admit, and accept that this is an expensive stock that's doubled in only a few months (I forget the exact time frame but just the other day it was 70).

[Thinkingahead]

I'm long MON and MOS, but have tight stops on MON. MON is unbelieveably exciting, but the 2009 earnings forecast is $4. $125 is a lot of stock price to be riding just 4 bucks. MOS is different. The forward PE on that is around 13, with monster growth. Plus, it dominates the phosphate business and doesn't need to rely only on Potash (or compete with POT and the rest). Finally, forget about anybody making Nitrogen based fertilizer from Nat Gas. Anybody can join that crummy commodity business.

[wutanidiot]

The writer must be smoking some good stuff!

[COMMENT HAS BEEN EDITED TO REMOVE ABUSE]

[The YellowRose StreetBeat]

Is he writing this article to help record his own truthful convictions or is he writing this article because he wants the price to pull back to buy more shares.

I don't know him so I don't know. Anyone who has been following him for a while might be able to provide some useful insight here.

[MAN90]

I SEE GREET IN EVERY LETTER AND ALSO POT IS NOT THE ONLY COMPANY OUTHERE PROVIDING FERTILIZER, LAST YEAR IN APRIL THE SAME COMPANY HAD BETTER EARNINGS AND THE PRICE WAS AT $50.00, I CAN SAY FRENZIE IS MORE LIKE IT THAN REALITY, FEAR OF HEIGHTS WILL SET IN WHEN SELLING COMES IN EARLY NEXT WEEK, WHEN EVERYBODY IS TRYING TO GET IN IS TIME TO GET OUT, THAT IS WHAT SMART MONEY DO AND HAVE BEEN DOING FOR EVER. AND THEY ALWAYS TAKE YOURE MONEY AHEAD OF TIME BEFORE YOU EVEN KNOW IT. FOR THEM IS JUST ANOTHER DEAL FOR YOU IS THE EXCITEMENT THAT THE PRICE HAS GONE UP AND IS REALLY HIGH NOW SO YOU SHOULD BUY MORE... GO AHEAD DUMBELLS BUY MORE AND MAKE THE RICH RICHER IS REALLY HIGH NOW IS A GOOD TIME TO BUY MORE, HA HA HA HA .

[crispos]

Use a logarithmic chart for starters if you want to evaluate stock technicals.

Use a spreadsheet and a model to figure out the upside. Let me know what the price of potash will be a year out while you are at it.

Suffice to say it's harder to grow a $60 Billion market cap than a $6 billion one.

[Bumski]

Any thoughts on TNH and TRA? I am long on TNH. Thanks.

[WACG]

If the author's worries about the share price of POT are derived from looking at a chart of the share price then why not drag out a chart and look at the price of the "stuff" they are selling.

[surgcare]

If this guy believes what he is saying ,why is he long these stocks . Could it be he's looking to add to his position buy others bailing out ?

[pitchforkpaul]

No matter what, this week will be both interesting and volatile...
I am from MO and I am long on CALM, MOS, MON, BG, AGU, FEED, & some of the coal stocks. They have shown me what they can do! Yes they have moved very high very fast; can they go higher? Do you want to bet against them? I don't...