May 22, 2009
Over the past few months, investors’ appetite for risk has increased
dramatically. With that we have seen a transition back into those sectors which
were hot, and had quickly become not. Our two favorite sectors here at
theinvestar.com, LLC have been uranium and potash. We have been bulls on these
two sectors for some time and the reasons are becoming more and more apparent in
the potash industry.
Pricing power is one of the most attractive qualities for
the potash industry as a whole. Canpotex is a price setter at the end of the
day, certainly not a price taker. This is the Canadian marketing arm for North
America’s largest potash producers, in short a “cartel”. Although demand has
slumped in recent months due to the world slowdown, many other commodity prices
have fallen dramatically and still supply outstrips demand. With the potash
industry right now, yes earnings are falling along with revenues as sales fall,
but fortunately the companies are not flooding the market now to get these
prices and forfeiting the health of tomorrow’s market. Too often we see this,
but it seems the Russian/Ukrainian potash companies are on board and need not
sell all of their production.
With all this said, it is easy to understand how stocks
such as Potash Corporation of Saskatchewan (NYSE-POT), The Mosaic Company
(NYSE-MOS) and Agrium (NYSE-AGU) have performed so well. Potash Corp. has been
on a tear as of late and much as we have been evaluating our uranium companies
lately, we have been using those same metrics to evaluate the potash companies
we follow. We had advised those who pay for our services to buy half of their
desired position in POT once it crossed and closed above US$105, which occurred
Thursday May 14. The second half was to be acquired once the stock closed above
US$110, which occurred on Monday May 18. We have seen the stock bounce off of
the support at $105 when it came under selling pressure, which was most likely
due to option traders trying to “push” the stock towards various strike prices.
Our main thesis relies on the 200-day moving average which
the stock recently breached. We believe that POT is a stock where the 200-day
is very important, going all the way back to when the stock sold off in
mid-September. This is when the stock could not crawl back above the 200-day
and this inability caused a massive sell off taking the stock from the US$200
level all the way down to US$50.
Our thesis holds up across the board, as both Agrium and
Mosaic have also both crossed over their 200-day moving averages and appear to
be breaking out. These stocks shall follow Potash, but it is positive to note
the indicators are all flashing buy indicators to us. All three charts are
eerily similar too, so our faith In them we feel is justified.
We believe we are in the early stages of the rebound in
potash stocks. China and India still have massive populations to feed and
Brazil many acres to plant to feed the world. American farmers will continue to
use potash for their corn, wheat and other grain plantings to increase yields
and keep the soil from being depleted. Currently we see the leaders leading,
but we believe in “trickle down” economics in markets such as these and believe
that it is but a matter of time before this market momentum works its way down
to the juniors. Once we arrive to those stages, there will be many fireworks to
watch as the juniors awaken and begin their runs.
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