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Bull/Bear Report - Potash (POT) - Growing profits or up in smoke?
Are there no safe havens in this crazy market? As the financial and consumer stocks falter other sectors appear to be following suit.
It's been one big drag for investors in 2008 and there appears to be no end in sight despite the subtle bounce higher since the start of the second quarter.
One group that has prospered during these difficult times is the commodity space. Anything having to do with commodities has done very well for investors and that trend does not want to slow.
Specifically, agricultural commodities have rallied on world wide demand for food and ethanol. The largest beneficiaries of the growth are the chemical and fertilizer companies.
In the last year alone stocks of fertilizer companies have tripled in value or more. Does that mean we have another bubble on our hands?
Possibly, but feeding the world and maximizing crop yields suggests that the uptrend could continue for some time. Should one be looking at momentum or fundamentals here?
With stock of the week Potash (POT) both the fundamentals and the momentum would be positive in my opinion. Even with huge appreciation in value shares of POT trade for just 17 times forward earnings.
So, should you buy or sell Potash? Find out what our bloggers have to say about the stock.
The risk of course is that earnings growth slows resulting in a nosebleed valuation and the potential for a precipitous drop. Obviously on the momentum side action over the last year has been very bullish.
One of the more attractive features on POT is that the company should do well no matter what happens with the US economy. Ironically, in most cases stocks like POT are defensive plays that do well during recessions.
People need to eat and they will pay for food no matter the cost. With that support, demand for POT should continue going forward.
I like the stock and I think POT is one of the safer plays for speculators. Of course the momentum and growth could reverse course, but the reward seems worthy of the risk.
Here are the bull and bear cases from our bloggers:
Bull Case - Goodwill Hunter
rstack thinks Potash could deliver a "perfect storm" of profits for investors.
Potash has been on a roll since July 2006. What has fueled this growth is record demand and growth of corn crop's and wheat demand. What I like most about POT is that they own three mines (cutting out the middle man).
Record crops drain soil necessitating fertilizer need and also under fertilization. There are 195 ethanol plants in America taking anywhere from 25-50% of the USA corn crop for 2008. Some plants are expanding and demand for ethanol in the near term should stay at current levels or increase.
Congress could stop or limit new licenses for ethanol plants. Foreign demand and Potash price increase for fertilizer should fertilize profit margins and stock price momentum.
The prudent bear in me is looking for the perfect storm. I have faith in the US economy with its Keynesian policy's. The world economy in general is stable. It would not be a surprise to see potash @ 300 in a year or so IMHO.
Bear Case - Ahknaten
Ahknaten wants you to short Potash and buy one of several alternatives instead.
Although pot is legal in British Columbia, it's not legal in Saskatchewan - nor should it be.
Short POT.
Although I love Canada and I have a bias towards Canadians, I think POT is overvalued. Doing the usual procedure I follow in eVal (valuation software), I find a target price of $63, much lower than the current price of $176. POT has a high PE, a high price/book, a high F-score and high accruals - so I'm concerned, as it doesn't have the value/quality story that I would like to see. It has quite a lot of analyst coverage already, so I don't see many more analysts taking coverage of the stock. It's quite possible that more analysts might 'drop coverage' on the stock, and if that happens, that seems like a strong negative catalyst to me. After all, some analysts love to cover stocks that they like, but they seem to drop coverage on ones they hate. Weird, isn't it?
Would you like a few nice chemical companies to look at?
How about: DOW, FOE, LZ, MEOH, NCX, OMG, POL and SHI
I'm sorry; I'll pass on POT and get addicted to another stock.
I can certainly appreciate the bear case on POT. It would be nice to find an entry point at a lower price, but I just don't see that happening. Besides timing the market is difficult in any condition. It is even more so with all the uncertainty and volatility.
While it would be easy to say POT and other fertilizer names like Mosaic are bubbles waiting to pop I would be reluctant to bet against the trend here. World demand for food should continue despite troubles in the US.
If shares were trading for 50 times forward earnings I might be a bit concerned, but that is not the case. At the moment, POT is still a buy in my opinion.
Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs
Additional resources on Potash and this sector:
Don Barrett -- Buy Potash? You must be smoking pot.
Doc's Diamond's -- What Goes Up...
Louis Navellier on related stock Mosaic:
Sector Resources:
Jonathan Coyle -- Running out of food? You're Smoking POT, MON
Sector Intelligence: Materials
Comments (2)
rstack![[TypeKey Profile Page]](http://blogs.investorplace.com/nav-commenters.gif)
:
when I do my research I take advise from analyst's thought's I say, when I listen to them.That their advise is "the wisdom of a fool".Never base your opinion on the number of analyst following a stock or totaly on their opinon. Form your own opinion.Qualitative and Quantitative analysis.I also look at the technical aspect of the stock in question ie.The chart. A wide number of factors come into play and a opinion is formed.Then I go to the "human factor" The market is a auction of human sentiment.Then you must determine as Ben Graham put it "is the wisdom of the crowd rational or irrational" form your own hypothesis.In the case of potash as jonh maynad keynes put it IT"S PROFIT NOT THRIFT.and their siting on a POT of gold
Posted by
rstack |
April 14, 2008 3:28 PM
:
Look what's happening to POT and other related commodities? GS removed POT from their "conviction buy" list citing the stock's > threefold gain over the past year and a stronger US Dollar. Other financial institutions followed suit.
POT tumbled 33 in five days. Can anyone see this bearish trend reversing in the next week or two? Or do you think it is downhill for quite a while? I entered into an Iron Condor on POT during the past 10 days with 630/640 Calls and 195/190 Puts. Fortunately I was able to unwind the PUT Spread in the nick of time with a small cost. I'd appreciate any comments.
Posted by
Netzoomer |
April 29, 2008 6:31 PM
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