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CF Industries Holdings, Inc. (CF)

CF Industries just reported earnings today (November 5th) of $6.35/share which was in the upper range of estimates (mean: $5.70, high: $6.75, low: $4.91). The annual earnings of this company are large at 28.19 over TTM (trailing twelve months). With an industry average P/E of 14.3 (according to MorningStar.com) this company should be worth around $403.11. However, CF is expected to see negative earnings growth of -7.08% over next year. As a twist CF is also expected to grow by 10.68% per year for the next 5 years. This puts investors at odds over how to trade CF. From one perspective CF is not looking good into next year. From another perspective; the company is still expected to grow well over the next 5 years. Since fundamental analysis could not convince me over which way to trade the stock, I turned to technical analysis with the October to December option expiration date returns since inception.

Above you can see that CF has performed well over the course of many years, but not so well recently. With a -15% worst return I looked at where CF is trading today relative to October 17th and it's at $205.48 which means it has already lost -4.85%. This recent decline gives us an opportune look at a new position. If the stock were to decline -15% this implies a max low of $183.28 for December option expiration (note: of course a decline larger than -15% is always possible). If we look at the support levels on CF we see that the $190 level is both an important resistance turned support level and right where the 200 SMA is located ($191.79).

Based on the information above I suggest the following trade.

(click to enlarge)

Option Trade: CF - Sell Dec'21 180/175 put spread (Bull Put Spread)

(Sell 180 Put/Buy 175 Put)

Size - 5% of Option Spread Portfolio Size = 1 spread)

Entry: Sell Limit: 0.85

Stop Loss: 1.70

Exit Price: 0.00

Max Return: 20.48%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin.)

Potash Corp. of Saskatchewan, Inc. (POT)

Potash, another fertilizer stock, reported earnings of 0.74 on October 25th and marginally missed earnings by 0.01 (0.75 was the consensus). This stock has been struggling to get back up to its 2011 price levels because the company has missed analyst estimates for the past five quarters. At a 15.07 P/E it is not necessarily cheap like CF Industries because although the company is expected to grow next year by 12.09%, POT is only expected to grow by 4.75% over the next 5 years. After this company missed estimates for the past 5 quarters I'm not sure I trust it going into future earnings. However, since the next round of earnings are not until January 28th, I decided to look at the October to December option expiration date returns to see if there might be a trade in the short term.

Above you can see that the returns for POT during this period have been quite mixed. The average return has been positive but we've seen more negative years than positive. I'm not a fan of POT right now, but since I know fertilizer stocks begin to outperform going into the winter months I cannot suggest a bear call spread. Hence, I cannot suggest a trade at this time.

Market Vectors Agribusiness ETF (MOO)

To talk about fertilizer stocks without mentioning the agribusiness ETF is impossible. MOO's top ten holdings include: Monsanto, Potash, Mosaic, Agrium, and then agricultural equipment stocks. Fundamentally it's hard to speak of this ETF but e*Trade shows MOO having "long term earnings" of 10.04 while the current P/E is 12.11, so we're seeing a bit of an overvaluation. Technically the stock seems stuck between the 20/50 SMA and is strongly holding support at $51. On a monthly chart MOO has made a number of higher lows but also lower highs. It seems clear on this monthly time frame that MOO is about to make a large move to the up/downside.

(click to enlarge)

To look for answers I decided to look at the October to December option expiration date returns since inception.

Above you can see that MOO has traded very well during this time frame since inception. Given how the ETF has held the $51 level combined with a historically implied max low of $49.03 I suggest the following trade.

Option Trade: MOO - Sell Dec'21 49/48 put spread (Bull Put Spread)

(Sell 49 Put/Buy 48 Put)

Size - 5% of Option Spread Portfolio Size = 5 spreads)

Entry: Sell Limit: 0.20

Stop Loss: 0.42

Exit Price: 0.00

Max Return: 25.00%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin.)

Disclosure: I do not own any investments in CF, POT. I'm short ZSL. I may insert footnotes to show my references for certain information.

Charts and fundamental data come from Finviz.com and Tradingeconomics.com.

News from: www.theflyonthewall.com.

Source: Agriculture Stocks And ETFs Appear Strong Through December