It's a market than can frustrate -- and humble -- institutional investors and individual investors alike. Moreover, perhaps the most memorable dimension to the bear market that began in October 2007 will be its ability to take down the stocks of companies with demonstrated business models, and Potash Corp. (NYSE: POT) is one. Potash remains one of the preeminent fertilizer companies in the world, producing three critical, primary plant nutrients and phosphate animal feed ingredients, for both developed and developing world markets. It is the largest producer in the world of its namesake, potash, which accounted for 43% of revenue in 2008.
And yet, none of the above was able to save Potash's shares from the carnage caused by the financial crisis and global recession. Overvalued during the leveraging bubble, prices hit an out-of-sight $243 before Wall Street some how saw fit to drive the shares to $33 -- stopping out all but the most long-term investors. Moreover, just as the leverage-era price was irrational, the view from here argues the current price, roughly $81, is equally irrational, assuming any semblance of growth returns to the global economy in late 2009/early 2010.
And that's the reason for the Buy rating now: don't expect POT to re-visit $240 soon, but the stock price is headed north of its current p/e of about 8. The First Call FY 2009/FY 2010 EPS estimates for POT are $10.25 to $12.25.
If you were stopped-out with POT earlier, it's understandable why one would feel reticent about re-establishing a position: there is real risk with POT, particularly if key emerging market demand, particularly in China, does not start to rebound by year's end. With the aforementioned as a backdrop, the view from here still argues that the risk / return for earnings growth is favorable, with shares priced in the $80-range.
Stock Analysis: Potash is a moderate-risk stock. Consider buying a 25% position in POT now; then buy another 25% in three months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your POT position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $57.
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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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Reader Comments (Page 1 of 1)
4-01-2009 @ 8:09PM
Bob said...
Caution out there. In my opinion the current North American potash price is being held artificially high by producers in order to provide a higher bargaining position with upcoming Chinese negotiations. North American farmers and fertilizer dealers are saying NO to these high prices. If the Chinese say NO... potash prices could crumble this spring.