This week I’m recommending a stock
that is my second favorite in the agriculture segment (my first being CF
Industries, which has already run up too much to buy at these levels), Potash Corporation (POT). Potash produces and sells fertilizers
and industrial and feed products in the US and Canada. Last week they recorded a weaker than
expected Q4 earnings report with earnings of $0.76/share ($0.10 less than
expectations) and revenues totaling $1.86B ($2.09M expected). While the quarter fell short, Potash
recorded its second strongest year ever, with earnings of $3.51/share on $8.7B
in revenues. What attracted me to
this stock is that even with a bad quarter, the stock didn’t drop like it
should have, but instead rallied almost 4% for its highest close since November
7th.
When looking at this stock, it’s
important to look at how the grains are trading (soybeans, corn and
wheat). If you look at all three
commodities, they all point to going higher, right into the big growing season
in the US. High grain prices means
more people will be farming this year, which translates into a need for more
fertilizer and feed for the crops.
Potash has a market capitalization
of $40.64B and is trading at just 12X foreword earnings. The company is growing quarterly
revenues by over 140% year-over-year (YOY). Potash does pay a small dividend of 0.60%, but you buy this
stock based on its long growth potential.
Analysts currently have an average price target of $56, so trading at
it’s current level of $47.45, there is a lot of room to the upside. The stock was down almost 20% last
year, but it’s currently up 11% this month, greatly out performing the
market.
Looking at the technicals of Potash
the chart looks very strong. After
making a new 52-week low in mid December of $38.42, Potash has built an
inverted head-and-shoulders, with the bottom of the right shoulder at $40.02. The day they reported their earnings, the
stock broke through the 23.6% Fibonacci retracement, and is less than $0.50
from the key 38.2% retracement of $48.18/share. Potash is making big moves to the upside (including a recent
break above the 50 day moving average) on very heavy volume, volume not seen
since September 22, which is another bullish indicator.
My advice for trading this stock is
two fold. If you are looking to
trade it short term, then buy at the market on Monday and stop yourself out at
$44.40, slightly below the 23.6% Fibonacci retracement. I think Potash will find support there,
but in case it doesn’t you’ll be out of the trade, limiting your losses. If you have a longer-term time horizon,
place your stop at $42.50, which is slightly below the long-term downtrend line
from the all-time highs made a year ago.
For the upside potential, I see the stock going to $52 in the next three
months; with a high target of $58 by the end of the year for a 22% gain.
Full
disclosure: I currently do not own
POT and have no plans to buy the stock since I am already overweight in the
agriculture sector.
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