In this column back on Monday, Aug. 4, I wrote about Potash Corp. (NYSE: POT), advising investors to sell the company’s shares immediately, and to buy them back later in the year, after the outlook for the company’s business became more clear. At the time I said the reasons for taking profits on the stock included:
- A sell-off in commodities, affecting grains, driven by a rise in the U.S. dollar, by hedge funds that were forced to sell some of their holdings due to redemptions, some demand destruction due to the high fertilizer prices, and the expectations of a temperate summer.
- A very real fear that the federal government might scrap the ethanol program early next year, after the elections ended – a move that would decrease fertilizer demand.
- And necessary profit-taking by long-term investors who – fearing an increase in the capital gains tax – might wish to re-establish a much higher tax basis in the shares.
On the Friday before the column appeared, Potash shares closed at $201.60. Readers who embraced my analysis were very glad that they did (one reader actually wrote in to say so). By the following Monday – Aug. 11 – the company’s shares closed at $160.91, a decline of 20%.
Potash shares remain well below the $200 level. On Friday, in fact, the stock closed at $175.24 – but only because they’d rocketed $11.74 each, or 7.18%, on that day alone. I’d already changed my view of Potash’s prospects, however.
Today, with the massive liquidation in commodity positions in hedge funds behind us and the risk of higher capital gains taxes abating fast in the middle of a crisis that demands stimulative moves, the current stock-price action reveals that most of the tax selling has also occurred. So we return to fundamentals.
But stock fundamentals got suspended in the markets as systemic risk took over with the threat of a financial collapse threatening to rise out of control. The United States and other governments – as well as their respective central banks – acted both decisively and appropriately in recent weeks, meaning the risk of a systemic meltdown was contained. Further measures are being implemented that not only saved the day, but also are going to allow the U.S. financial system to return to a more-normal operation, which will enable the U.S. economy – and U.S. investors – to start prospering again.
Interestingly, during the crisis Potash has been rising consistently, as investors started going back into commodities. Clearly, the U.S. government’s necessary solution, very similar to those implemented in the successful interventions of many financial systems in other countries, will generate higher expectations of growth.
To add to this, the summer in the United States turned out to be not as benign as expected with crops. Hence, the U.S. Department of Agriculture cut its projections for corn and soybean production. This will keep supplies constrained and will send prices higher.
Staying with the fundamentals, the long-term story of escalating worldwide demand for grains due to the large and sustained growth of real incomes in the emerging markets – especially in China, India and Brazil – remains intact. The price actions in all these markets have been greatly exacerbated by profit-taking and panic selling and all represent superb buying opportunities today. Global growth is not suffering in the way that financial markets would lead you to believe. The effect on the real economies of these countries has so far been minimal.
And Potash is superbly positioned to use its own strong cash flow to reinvest in “the world’s best potash assets – our company – at an attractive price,” William J. “Bill” Doyle, the company’s president and CEO said recently. Less than two weeks ago, Potash launched an aggressive share-repurchase program under which it will buy back as much as 10% of its public float (currently 31.5 million shares) by Jan. 30. At the time this latest buyback plan was announced, it was valued at about $2.36 billion.
This latest buyback plan follows a just-completed buyback plan under which Potash repurchased and retired nearly 16 million shares of its stock.
No doubt, these are compelling reasons to get back into the stock at a much lower valuation. Given last week’s rally, it is advisable not to buy everything at once, but instead to edge into the stock in stages, especially taking advantage of pullbacks.
Action to Take: Buy Potash Corp. (NYSE: POT). Given the volatile markets, right now, try not to purchase your entire position in a single trade; instead, build your position in increments, taking particular advantage of share-price pullbacks. **
[Editor’s Note: Horacio Marquez was working as a vice president of the Merrill Lynch Emerging Markets Fixed Income Group in 1994 when he correctly predicted that both Argentina and Mexico were headed for currency crises - cementing his reputation as an expert on both the emerging markets and on the nuances of global finance. Now Marquez brings that expertise to you, with his newly created “Shadow Stock Trader” specialized trading service. To find out how to subscribe, please click here. “Buy, Sell or Hold” is a new Money Morning feature that has most recently analyzed such companies as Garmin Ltd. (Nasdaq: GRMN), Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B), . (Nasdaq: CS), . (NYSE: CVX), Valero Energy Corp. (NYSE: VLO), General Electric Co. (NYSE: GE), and steelmaker Nucor Corp. (NYSE: NUE).]
** Special Note of Disclosure: Horacio Marquez holds no interest in Potash Corp.
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