It’s been said that stocks take the stairs up and the elevator down. When they’re going up, the process can be painfully slow, but when they’re falling it’s as though there is nothing anybody can do to stop their descent. The declines can be so swift and frightening that it feeds on itself, inducing nervous shareholders to liquidate their shares for fear of being wiped out.
Case in point is Potash Corp. of Saskatchewan (POT). Shares fetched $179 on 9/22/08. Today they’re selling for $86. There was no stock-split here, instead pure unadulterated selling. Ouch!
Not that many years ago companies in the agricultural chemicals industry were mere afterthoughts. The businesses were not sexy and didn’t have a killer application or slick marketing departments like Apple, Google, Intel or any of the hundreds of other tech stocks that outperformed during the late nineties.
Fertilizer is just flat out boring. It is a market that fills a critical part of the food chain but is typically classified as a defensive stock, not a growth business. Well, not until oil prices started rising rapidly.
Action in the oil markets combined with fears of global warming resulted in interest in alternative energy. Solar and wind power are great, but they wont power our cars. Natural gas is cheap and abundant but requires drilling and drilling is a bad word.
That left ethanol as the alternative energy of choice that could make a difference now. Given that ethanol comes from corn it was only natural for farmers to begin planting more and more corn to supply demand. (See also: "Top Alternative Energy Plays.")
Price increases prompted farmers to plant more while searching for ways to increase yields. Well, fertilizers helped improve yields and turn questionable land productive. Companies like POT suddenly had their own killer app.
Defensive fertilizer makers were now suddenly momentum stocks. POT flew all the way to $250, but what goes up must come down. Indeed revenue and profit growth justified the appreciation, but valuations became speculatively rich.
That being said a catalyst was needed to prick the bubble.
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That catalyst was a sharp drop in oil prices followed by a massive credit crisis on Wall Street. With the chaos that has now ensued, speculators suddenly realized that growth in farming could and would evaporate overnight.
POT dropped as a result and now trade for less $90 shares. I feel like we have been living in a dream. The sexiness of fertilizer stocks disappeared in an instant. We are left with a company that should once again trade as a defensive stock. (See also: "Play Defense With Coca-Cola (KO)" and "Mosaic (MOS): More Than Just a Boring Defensive Stock?")
With a deep recession on the horizon, owning POT at these lower prices makes sense. All is not as bad as it seems.
The company reaffirmed its plans for expansion last week and believes fertilizer stocks have been hit by an "overreaction" to the financial crisis. The Chinese economy will continue to expand as will consumer incomes across Asia, which means demand for agricultural foods will continue to expand despite what the U.S. economy does. (Be sure to check out: "Why China, Why Now?")
Population growth isn’t slowing, particularly in emerging markets. Farmers will continue to demand better crop yields for the foreseeable future. The old real estate truth that "they’re not making any more land" holds for POT as well.
POT may be one of the defensive positions that, over time, may offer growth. It may never be as sexy as it once was, but in this market I’ll take cute.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com and check out:
