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.