Buy, Sell or Hold: Potash Deserves Another Look 14 comments
Horacio Marquez
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In this column back on Monday, Aug. 4, I wrote about Potash Corp. (POT), advising investors to sell the company’s shares immediately, and to buy them back later in the year, after the outlook for the company’s business became more clear. At the time I said the reasons for taking profits on the stock included:
- A sell-off in commodities, affecting grains, driven by a rise in the U.S. dollar by hedge funds that were forced to sell some of their holdings due to redemptions, some demand destruction due to the high fertilizer prices, and the expectations of a temperate summer.
- A very real fear that the federal government might scrap the ethanol program early next year, after the elections ended – a move that would decrease fertilizer demand.
- And necessary profit-taking by long-term investors who – fearing an increase in the capital gains tax – might wish to re-establish a much higher tax basis in the shares.
On the Friday before the column appeared, Potash shares closed at $201.60. Readers who embraced my analysis were very glad that they did (one reader actually wrote in to say so). By the following Monday – Aug. 11 – the company’s shares closed at $160.91, a decline of 20%.
Potash shares remain well below the $200 level. On Friday, in fact, the stock closed at $175.24 – but only because they’d rocketed $11.74 each, or 7.18%, on that day alone. I’d already changed my view of Potash’s prospects, however.
Today, with the massive liquidation in commodity positions in hedge funds behind us and the risk of higher capital gains taxes abating fast in the middle of a crisis that demands stimulative moves, the current stock-price action reveals that most of the tax selling has also occurred. So we return to fundamentals.
But stock fundamentals got suspended in the markets as systemic risk took over with the threat of a financial collapse threatening to rise out of control. The United States and other governments – as well as their respective central banks – acted both decisively and appropriately in recent weeks, meaning the risk of a systemic meltdown was contained. Further measures are being implemented that not only saved the day, but also are going to allow the U.S. financial system to return to a more-normal operation, which will enable the U.S. economy – and U.S. investors – to start prospering again.
Interestingly, during the crisis Potash has been rising consistently, as investors started going back into commodities. Clearly, the U.S. government’s necessary solution, very similar to those implemented in the successful interventions of many financial systems in other countries, will generate higher expectations of growth.
To add to this, the summer in the United States turned out to be not as benign as expected with crops. Hence, the U.S. Department of Agriculture cut its projections for corn and soybean production. This will keep supplies constrained and will send prices higher.
Staying with the fundamentals, the long-term story of escalating worldwide demand for grains due to the large and sustained growth of real incomes in the emerging markets – especially in China, India and Brazil – remains intact. The price actions in all these markets have been greatly exacerbated by profit-taking and panic selling and all represent superb buying opportunities today. Global growth is not suffering in the way that financial markets would lead you to believe. The effect on the real economies of these countries has so far been minimal.
And Potash is superbly positioned to use its own strong cash flow to reinvest in “the world’s best potash assets – our company – at an attractive price,” William J. “Bill” Doyle, the company’s president and CEO said recently. Less than two weeks ago, Potash launched an aggressive share-repurchase program under which it will buy back as much as 10% of its public float (currently 31.5 million shares) by Jan. 30. At the time this latest buyback plan was announced, it was valued at about $2.36 billion.
This latest buyback plan follows a just-completed buyback plan under which Potash repurchased and retired nearly 16 million shares of its stock.
No doubt, these are compelling reasons to get back into the stock at a much lower valuation. Given last week’s rally, it is advisable not to buy everything at once, but instead to edge into the stock in stages, especially taking advantage of pullbacks.
[Editor’s Note: “Buy, Sell or Hold” is a Money Morning feature that has most recently analyzed such companies as Garmin Ltd. (GRMN), Berkshire Hathaway Inc. (BRK.A), Cisco Systems Inc. (CSCO), Chevron Corp. (CVX), Valero Energy Corp. (VLO), General Electric Co. (GE), and steelmaker Nucor Corp. (NUE).]
Disclosure: Horacio Marquez holds no interest in Potash Corp.
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This article has 14 comments:
Thus far, India passed through the secular age of Information Technology. This was an important first step as the tools to enhance productivity were a must. She did this not just for herself, but for the globe too. In doing so she created a trickle of wealth. She next proceeded to the secular age of Consumer Discretionary; everyone from the fruit vendor to the CEO carries a mobile today; and it is still growing. Bicycles have been upgraded for scooters and motor cycles, scooters and motor cycles have been upgraded for cars, retail malls and leisure have grown in importance, people bought houses; all this in the secular age of Consumer Discretionary which now draws to a close.
Now, she strives to enter the secular age of Basic Materials in anticipation of the secular age of Industrials. Within that secular trend, she now enters a strong cyclical upturn in Basic Materials. This, in anticipation of a cyclical upturn in Industrials, with the Commonwealth Games as a catalyst. Yes, roads are needed, trains and public transportation is needed, hospitals are needed, power stations are required (even nuclear power is needed), potable water is necessary as is proper sewage, residential accommodation is needed, office space is needed, retail malls are needed; the Country strives to urbanize; all this is needed and much else. So far India is still at the need recognition stage; real demand exists because the need & the ability to pay are both in place. Yet, so far much has been promised, and little delivered.
Today, India is at the door-step of a secular age of Basic Materials. Before entering the secular age of Industrials (which we call Capital Goods in India); India first must past through the age of Basic Materials. She needs iron ore, steel, copper, cement; besides much else to build the nations infrastructure. Similarly, she needs chemical, fertilizer, seed; besides much else before she builds her tractors. She is also entering a strong cyclical upturn in Industrials, which will be led by a cyclical upturn in Basic Materials.
So what holds India back:
Firstly, Basic Material prices have been greatly elevated. China passed through its secular age of Basic Materials a long time ago. It passed through its secular age of Industrials and entered the secular age of Energy in 2003. In the run up to 2008, in the midst of its secular age of Energy, China passed through a cyclical upturn in Basic Materials & Industrials, aided by the Olympic Games as a catalyst. For India, it is always a dis-advantage being second in line; demand is the desire backed with the ability to pay and the ability to pay is impacted by price levels. Nevertheless, prices have pulled back, with expected reduction in China demand following conclusion of its cyclical Industrials cycle, and so India should be ready to recommence the Basic Materials cycle from a lower base than recently; the demand side of the equation is thus in place.
Secondly, capacity & supply was an issue. Cement capacity has been increased, as has steel and iron ore, fertilizer and chemicals amongst other Basic Materials. The corporates (Sesa Goa, Sterlite, Hindalco, Tata Steel, Essar Steel etc.) have done well to create the required capacity expansion and they continue to do so; for this is the secular age of Basic Materials. Of course the global miners and producers are ready and willing to supply at the equilibrium price. So supply is in place too.
Thirdly, is the capital goods industry ready to run the cyclical up-turn? Yes, not only ready, but rearing to go. So far the Common Wealth Games infrastructure needs are woefully behind, perhaps with the exception of the airports and metro which are on target. Amongst the capital goods sector my favorites are L&T, Punj Loyd, GMR & Mundra - all ready to build airports, special economic zones, ports and other infrastructure. So this is no impediment.
Finally, its the government. This is the greatest impediment to progress in India. It has changed a lot over the years, but controls still slow the pace of progress. Efficient price discovery is hindered because of interventionist government policies, be it in mining, sugar, steel, iron ore, cement, chemicals or fertilizer; no matter how noble the intentions, is always bad. Intervention can be legislative, it can be a dictatorial policy note, it can be an import or export tax, it can be a simple suggestion. Upcoming elections will cause problems short term; but perhaps once that is done, better sense shall prevail - the risk of an international embarrassment during the Commonwealth Games might prove a change catalyst.
Now what confuses me is that the analyst community in India remains negative on materials but positive on capital goods. Is it not obvious, that for capital goods to succeed, first materials must prosper?
Gentlemen and ladies, India’s entry into a secular age of Basic Materials is not merely a trend within an economic cycle; it is a powerful secular trend with the ability to influence the global Basic Materials sector. Together with a cyclical upturn in anticipation of the Commonwealth Games, we have a very powerful catalyst in place for sector out-performance on an India and Global level.
is they own stock in those companies. What better way to increase
your fortunes than have the taxpayers cover your gambling losses
at the Stock Casino's
I think that we are over the hump, and will see a new high before 2009.
Excellent overview of India's prospects, giving a perspective on where good investment opportunities may exist. Thank you.
Unfortunately, we in the U.S. are receding towards just such a caste system - though many do not recognize it. Or maybe just don't have time or energy to deal with it. The tax system as well as political system (no term limits for congress = trouble) plus ever-swelling regulation on our lives make rising above middle-class status increasingly difficult - not impossible, mind you...but the barriers continue to rise. And that's economics. Let's mind the costs to our freedom as well.
There are some lessons for all to heed as we ponder the current economic situation and how to resolve it. Let's not jump on the bandwagon of any solution until we consider the risks to principles and the long-term view!!
I have no idea what the boneheads in Washington are going to do, but I suspect when the political posturing is over they will come up with a deal and these stocks will snap back nicely. We still have to eat ---- hopefully.