PotashCorp (POT.TO)

(Top Pick Sep 23/13, Up 18.77%) In the short term there is choppiness. Appears AGU-T has put out more profit warnings recently. The long term for POT-T looks really bright. The CAP-X profile looks much less than revenue.

Typically agriculture stocks do well at this time of year. The peak period of seasonal strength for fertilizers is from about the end of July until mid-September. The breakdown in the price of corn, wheat and soybeans, hasn’t benefited stocks like this. Chart is showing lower highs. However, this did have a significant reversal on Friday, which is typically a bullish sign. You want to see this move above resistance of about $35. Nothing looks favourable in the near-term.

A little bit weather related. Crops are going to be truncated and farmers won’t be quite as wealthy. You might find they go easy a little bit on fertilizers in the next planting season. He prefers Agrium (AGU-T) which makes a spread on their retail side in their earnings.

This is a food commodity and it is unethical to keep fertilizer prices high. Things broke with the cartel so it dropped. He would buy at 15 times earnings but would prefer to step aside until 8 times earnings.

We tend to have long cycles where commodity producers have pricing power, and at some point you go through a watershed where they don’t have as much pricing power. 2012 marked the beginning of a revaluation of paper assets and the lower revaluation of hard assets. Commodities have under-performed since then and showing no signs of changing. Because pricing is weak, farmers are less likely to spend their money on potash.

Likes the company and likes the commodity. The long-term fundamentals for demand for fertilizers are positive. This gives you almost a 4% yield while you wait. The company has cut back production. They are the low cost producers. They can make pretty good money at current potash prices. Good cash flow.

There are a couple of stories here. They have great cash flow growth going for the next couple of years as their CapX is ramping down a bit. They have low cost mines. The other side of the story is the price of potash, which collapsed 20%-30%. This has stabilized since the beginning of the year. Demand is very good this year. Potash pricing could increase over the next couple years if demand stays firm, but he doesn’t think the price range is very big. Not his favourite story. You are safe with the 4% dividend.

Will trade restrictions in Russia affect potash exports, and will it increase prices? The answer is no, because most of it goes to China. Potash prices are firming in China, India and Brazil. Expects the supply situation will be easing. The forecast for target prices on potash, a year from now, is below the current price. Feels this is short sighted. If you own, continue to Hold.

(A Top Pick Nov 22/13. Up 18%.) Still likes this. Has a great yield, which is one of the reasons why he bought it. One of the headwinds for them in the shorter term is that agricultural crop prices have come off quickly, especially corn. This leaves fewer receipts for the farmers to be buying fertilizers. Thinks the yield is going to support them and they are the low-cost guys.

(A Top Pick Aug 6/13. Up 31.22%.) Stock had got too cheap. Sold his holdings. A cyclical play, and is a tough industry to be in right now.

Potash inventories in North America are well below normal. Hold it if you own it. He has AGU-T

Contracts for potash pricing have come down quite substantially. Have shortened up in terms of the duration, so there is an element of expectation that these prices may not be so depressed for an extended period of time. Feels the stock has really gotten ahead of itself. He would be an owner in the low $30’s or below $30. Agrium (AGU-T) would be a better, more diversified play, and also has a better growth profile.

(A Top Pick July 4/13. Up 3.62%.) Missed his timing by about 2 weeks. Has been accumulating. Pays a nice dividend while you wait. A great long-term story.

Compared this with the XMA-T to get a relative sense of outperformance. In 2013, the stock torpedoed because of fundamental issues. Torpedoes usually occur only once. Ever since then, the stock has been climbing back, and is now back to an outperform position. He thinks this will continue.

Not very excited about potash. Doesn’t see any compelling reasons to go into it. In the long term, he likes the industry because it is an oligopoly and players such as this have pricing power as well as pricing leadership. He would prefer Mosaic (MOS-N) because he thinks, eventually, it will get taken out, but in the interim it has quite a large share buyback program. (He is Short this and Long Mosaic in a pairs trade.)