Forget the Ferts — Buy Seeds and Tractors

by Jim Woods | November 19, 2012 12:48 pm

About six weeks ago, I told you about fertilizer giant Mosaic (NYSE:MOS[1]) and its rather malodorous third-quarter earnings print[2]. Immediate reaction to the downbeat numbers was a selloff in MOS shares, as well as a hit to fellow fertilizer stock Potash Corp. of Saskatchewan (NYSE:POT[3]).

Both stocks were, at that juncture, close to breaking below support at their 200-day moving averages. Since then, shares of both MOS and POT have continued to stink up the Street. MOS is down about 10% since Oct. 1, while POT is down more than 11.5% since then.

MOS 286x300 Forget the Ferts    Buy Seeds and Tractors
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The charts here of both MOS and POT tell the tale of two stocks in the same sector coming under some very heavy selling pressure. Both stocks now have broken below their respective 200-day MAs.

Now admittedly, I didn’t think the selling in the space would be as intense as it has been. At the time, weak recent demand for potash in China and India were the main headwinds facing the space, but there were — and there continue to be — strong metrics in favor of stocks in the space.

POT 286x300 Forget the Ferts    Buy Seeds and Tractors
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Higher grain prices, lower crop stocks and the need to grow more feed to keep up with growing global food demand[4] still are factors arguing in favor of fertilizer stocks; however, the negative mood of the markets over the state of the fiscal cliff negotiations and European bailout uncertainty have teamed up to knock down most stocks — and ferts are no exception.

From a long-term perspective, I remain bullish on MOS and POT because they make the essential ingredient needed to grow the food that feeds the world. However, from a trader’s perspective, I would like to see some strength in both these stocks going forward before I get back into either.

If you still want to play stocks in the agricultural commodity space (and I do), there are better ways to do so right now than the fertilizer players. Two of those ways are seed company Monsanto (NYSE:MON[5]) and equipment maker Deere (NYSE:DE[6]).

MON 286x300 Forget the Ferts    Buy Seeds and Tractors
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Unlike the fert stocks, both MON and DE have been doing very well of late. The charts here of both show the relative strength in these two sector stalwarts.

Although it experienced a widened net loss in Q3, Monsanto also recently forecast a sizeable 17% boost in fiscal 2013 earnings. The optimistic outlook is in part because of expected sales of its newest genetically engineered corn and soybean seeds in the U.S. and Latin America.

Monsanto expects profits for the full year to rise to $4.18 to $4.32 a share, from the previous $3.70 per share. That estimate might, in fact, be too low, according to research firm Susquehanna. The firm expects Monsanto to see 20% growth in fiscal 2013, driven largely by new product introductions. Susquehanna reiterated its $115 price target on the shares.

DE 286x300 Forget the Ferts    Buy Seeds and Tractors
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As for Deere, this stock has seen big buying interest since September, with shares surging nearly 17% since hitting their September low. That buying has come on the back of some strong earnings, and anticipation that Deere will beat the Street again when it reports Nov. 21.

According to Jefferies analyst Stephen Volkmann, Deere saw solid September sales. One strong month could keep the recent buying going in this industry behemoth, and that’s very good for traders who want to jump on the DE momentum trade.

The bottom line here is though fertilizer stocks have been stinking up the market of late, there’s still positive metrics in the agricultural space, and that’s helping Monsanto and Deere make smart investors money.

So forget the ferts, and buy seeds and tractors.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Endnotes:
  1. MOS: http://studio-5.financialcontent.com/investplace/quote?Symbol=MOS
  2. rather malodorous third-quarter earnings print: http://investorplace.com/2012/10/catch-the-sweet-smell-of-fertilizer-stocks/
  3. POT: http://studio-5.financialcontent.com/investplace/quote?Symbol=POT
  4. grow more feed to keep up with growing global food demand: http://investorplace.com/2012/11/3-ways-to-turn-more-people-into-more-money/
  5. MON: http://studio-5.financialcontent.com/investplace/quote?Symbol=MON
  6. DE: http://studio-5.financialcontent.com/investplace/quote?Symbol=DE

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