Buy, Sell, or Hold Fertilizer Stocks: Agriculture Bust (Part II) 34 comments
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Sometimes stories are just too good too let go. They just have everything going for them…it seems. Lately, there hasn’t been a better “story” than agriculture. But I’m afraid, for the time being, it’s time to let go of it.
A couple weeks ago I wrote a fairly ominous prediction for fertilizer stocks (read "Agriculture Boom Goes Bust"). As you can see by a quick scan of the 27 comments, not too many people want to let go of this story. But the time has come.
On July 22, I concluded:
There’s not much upside and a lot of downside [in fertilizer]. So many things are going well for the agriculture sector for the long term. For now though, I’m afraid that could be what spells a big correction in agriculture stocks.
At Q1 Publishing we always focus on risk/reward. And when it comes to agriculture stocks and the upcoming earnings [reports], the risk certainly appears to outweigh any potential reward.
The past two weeks confirmed the risk/reward situation has gotten turned against us in the fertilizer industry. And the performance of the stocks through the past earnings seasons has proven that.
I get the reasons to stay long agriculture…trust me, I really do get it.
We’ve got the ongoing growth of subsidized ethanol production. Emerging markets are as hungry as ever and now have the money to pay for food. And it’s going to take a couple years of get emerging farms in Russia, Ukraine, and the rest of Eastern Europe to get up to speed.
The agriculture story has got it all. I’ve been covering the emerging agriculture situation for years (you can find my original article on “Fertilizer’s Fate” from July 2006 here). I’ve been bullish up until a little over a month ago.
Frankly, the huge run was all just a bit too much. It seemed like a bubble was forming. Everyone was talking fertilizer. CNBC was filled with nothing but Potash experts. Corn, wheat, rice, was all moving up. It couldn’t last, but I was waiting for a sign.
That sign was when Potash Corp (NYSE:POT) had a bigger market cap than Citigroup (NYSE:C). Sure, Citigroup has its problems that I’m not going to go into here, but Potash Corp more valuabl than Citigroup?
That was too much for me and is one of the big signs of a bubble about to burst (remember AOL buying Time Warner (NYSE: TWX)…).
The whole time, the agriculture story was just too tempting for many. As with all stock market stories, there is rarely a happy ending. Just take a look at what happened in the past few weeks.
Great Results and Greater Expectations
The past few weeks have should have been great ones for fertilizer stocks. But it wasn’t. Expectations were just too high. Nobody could live up to them.
- Potash Corporation (NYSE:POT) – The company that has gained a cult-like shareholder base reported it’s latest earnings on Jule 24th. The results were great. POT tripled its profits, revenues soared 94%, beat already fairly high estimates by 8%, and it raised guidance for the rest of the year. Could it have been any better? Probably not. But the shares slid from $210 to about $180 today adding to the decline from the June high of $240. That’s a pretty hefty total 25% correction from the top.
- Mosaic (NYSE:MOS) – Mosaic did even better than POT. Mosaic’s profits quadrupled, it beat consensus estimates by more than 15%, and more than doubled its revenues. It’s hard to imagine the report coming in any better. But Wall Street was clearly hoping for something more. Mosaic shares continued their slide from a June high of $163 down to about $112 today. That’s a decline of about 32% in the past two months.
- CF Industries (NYSE:CF) - CF Industries fared almost as well. The fertilizer producer, which produces phosphates and nitrogen and has no potash mining operations, scored a 36% increase in sales which led to a 204% profit growth for the quarter. CF’s record results which handily beat consensus estimates by almost 50% couldn’t prevent it from getting caught up in the agriculture sell-off though. Following the announcement, CF shares dropped 15% in the following two weeks.
That’s just a few of the major agriculture players that have taken a beating in the past few weeks. Almost anything related to agriculture has sold off. Other major ag-focused stocks like Monsanto (NYSE:MON), Deere (NYSE:DE), and Syngenta (NYSE:SYT) have all slid between 15% and 30% since their early summer highs.
An “Official” Bear Market in Agriculture
The sell-off has begun. Many of these stocks have had amazing runs. In the past few years, they’ve booked anywhere between 200% and 1,000% gains. That’s pretty impressive run, but now it’s over…for the time being.
The average sell-off in agriculture stocks has been about 20% so far. The big ones to the small ones…the seed companies to the fertilizers companies…it’s been a bearish across the board sell-off.
If we look at the agriculture sector as a market of its own, we’d be in official bear market territory.
From here it could be a long way to go before the uptrend resumes in these stocks.
Simple Case of Great Expectations
Don’t get me wrong, I still love the long-term aspects of agriculture. However, we’re going to have to look a lot harder when finding winners in the agriculture sector going forward. Food demand is still climbing, farmers need more fertilizer, and there aren’t too many other solutions around.
All the easy money has been made and if you’re not a long-term investor willing to wait out six months and possibly another 10% to 20% downswing, I’d move onto something else.
Remember, the agriculture story is a great one, but so was the internet, housing REITs, uranium etc. It took years for the real players to get sorted out from the dot-com bubble, the decent uranium stocks still haven’t recovered since the crash of 2007, and residential real estate…well, that’s a complete mess of its own.
Agriculture, despite how genuine an opportunity that it is, may be in for a similar fate.
Full Disclosure: I no longer own a short or long position in any of the companies listed above.
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This article has 34 comments:
I don't know where the prices will go, as we know that the stocks speculators (they should be banned) will drive the prices down no matter what, I am just pointing out that you have not selected the best comparisons. There are zillions of analysts making comments, prediction etc etc and many get thing right just because they make so many of them... and yours is the same....you hailed it, they ag stocks are plummeting but by no means it gives me more confidence to believe your analysis now and bookmark you as my favorite analyst..hey, Mr. Greenspan vall the housing bottom in late 2006..if he were right he would receive a nobel price..he was not..and now looks like a fool
I am not sure how this will play out in Ag stocks. The fertilizer costs are only pennies on the bushel (or other measure). The fertilizers also tend to lead to gains of many times the added costs of the fertilizer. The above argument does not mean that the actual demand for the commodities is decreasing. Plus there is not a one to one relationship between decreased grain prices and decreased demand for fertilizer. In fact, it would seem that the demand for fertilizer would be relatively unaffected. This might mean that the fertilizer stocks could start to rally before the commodity prices hit bottom. I don't think commodity prices have done that yet. The word from oil speculators is that the bottom there may be in the $90-$100 range. This is another 20% or more down from the current levels. If grain futures follow this scenario, the grain related stocks could just go down in sympathy with them. Alternatively some stocks, such as fertizer stocks, could start to disconnect from the downtrend due to the lack of the specific one to one connection of the demand for fertilizer to the price of the grains. Also if you envision the bottom as coming this fall, there may be good reason to continue to spend heavily on fertilizer because the grain prices will be higher again by the time the crops based on the fertilizer purchases are harvested. Certainly the demand for food is not likely to lessen appreciably anytime soon. Currently POT is hovering around its 200 day moving average. If it breaks below that I am guessing it might be better to sell it in the short term. If it rallies from its 200 day moving average sustainably, I think the stock becomes a buy again.
-POT workers strike could impact supply
-Inventory of Grains across the board are at historically low levels.
-Forward PE in single digits and getting lower
-Demand rising globally by all accounts
-Guidance decidely and emphatically positive
-Fall planting season soon upon us
-EPA rejects Tex Gov appeal to repeal ethanol mandate
-people don't have to drive everywhere, but peole everywhere have to EAT!!
Profit taking is creatieng another opportunity to make money in this company!!
STRONG BUY!!
And one further thought - and this is what I figured out recently: these analysts who work for big brokerages artificially try to scare investors out of good stocks in order to pick them up for wealthy clients at cheap prices for what they know is strong growth in the upcoming quarter. Do you ever notice how they pump these stocks at the top of their stock cycle, and dump on them at the bottom; in other words, these guys are a great reverse indicator - just watch CNBC and BNN to see what I mean. And this guy is no different.
2. Too many competitions - even Shengda Tech in China acquired a fertilizer company due to the craze in fertilizers.
3. Canadian brokers keep increasing their target price. Like Qualcomm to $1000 in 1999. I love this part.
4. There's already demand destruction showing. Just an example:
www.inquirer.net/speci...
Yap said preliminary reports show use of fertilizers had so far dropped by about 30 percent because of prohibitive prices.
Hope this help and don't let analyst upgrades blind you.
Same is said by the CEO of Mosiac during their conference call.
All this past months fertilizer prices have been climbing because of tight supply, price of fertilizer is significantly higher than it was a year before and its not going to come down anytime soon due to tight supply.
Over and above the Govt. of developing countries like India and China and Vietnam are subsidizing the price for fertilizer. So this high price is not going to reduce the demand for this fertilizer.
Look at the next years P/E for Potash it is near 8. Even if prices don’t go up and stay at this level then also the stock is too cheap.
The uptrend will resume in this space just like it did the past 6 years (that I have been watching it) after Labor Day and up until July.
Don't let the shills scare you out of your shares because the more bearish the sentiment is the closer to the bottom we are getting. $146 will be EASILY achievable once the trend reverses.
Agriculture is still very depressed in historical terms.
jimrogers-investments....
Solar
Wind
Alternative Energy Sources
???
I have to conclude though that while painful for me, that AG investments are really not "story" investments (i.e. some BS that Wall Street comes up with to sucker naive people into short-term plays) but that they have lasting and long-term significance.
It really boils down to
a. supply
b. demand
c. barriers to entry.
While movement of short-term money is really just "noise" that distracts from the longer-term trends.
Looking at the above
a. supply - potash is limited in supply as is recognized from the discussion above
b. demand - demand is increasing, this is not a "story", this is real, the world economy is creating more people who can afford to buy meat. To grow meat, takes grain, to grow grain requires potash and fertilizer.
Ignore all the noise about soybeans needing less fertilizer and ethanol, these are missing the point.
c. barriers to entry - Requires huge capital investments in equipment, land and as mentioned, very few places in the world are blessed with the abililty to produce.
Need I say more.......painful short term......correction occurring......long term buy/hold
Um, maybe because if you checked the actual balance sheets and earning reports you'd release that you have to have earnings to have a P/E. Citigroup has no p/e. All the fertilizer companies are worth more than citigroup. My local pub is worth more than citigroup. Citigroup has lost $1.79/ share over the last 3 quarters. That means they MUST make $1.79 in the next quarter just to break even. The forcast for the next quarter (Sept 08)is ummm...0.13/ share.
Heck it would be great if they even cut back on their losses. does anyone actually believe they will make their current 08 forecast of a loss of -$1.08/share????
drew
The argument about Citi and Potash market Cap is one of the stupidest things I have ever heard. Citi is losing money by the truck loads. PCS is making money by the truck loads. Why are you surprised that PCS's market cap has surpassed Citi? If Citi's market cap drops by another 20% - 30% (which is very possible in this market) does that mean I should go ahead and sell my shares in Research in Motion, Amazon or McDonalds. All these companies have a market cap between 40 - 70 Billion and have increased their stock price over the past 52 weeks. Very bad argument on the author's side
By the way, when you wrote your post at the end of July the prices for these Agri stocks were already way down. So the claim that you foresaw this drop is not accurate.
Very amateur writing