This article originally appeared on Traders Reserve.
Last week’s trouncing of agriculture stock The Mosaic Company (NYSE: MOS) makes it one of my top stock picks right now, providing traders with the chance to capitalize on a gross inefficiency in pricing.
When it was announced that Cargill would be liquidating the entirety of its position in the large fertilizer company, the market went haywire. Somehow the move was interpreted to be a negative for Mosaic, and the agriculture stock dropped by more than 15%. It has recovered some of those losses this week, but it still represents an insane bargain.
The bear argument was simple: The deal by Cargill takes an acquisition of the entire company out of play. Secondarily, the sudden availability of a large amount of shares — Cargill still owns some 64% of Mosaic would be too much for the market to bear.
Hello, does anyone care about valuation? Seriously, I get the concern, but nothing in the news diminishes one bit the future potential of Mosaic to generate huge profits. Is it not a discount of those huge profits that ultimately determines value to shareholders?
The drop in price is a huge opportunity to get one of the best investment opportunities available in 2011. With the move downward, the stock now becomes my favorite on my list of 10 Top Stocks for 2011.
Why the Bears are Wrong About Mosaic
While it may be true that the technical divestiture of shares may create problems for a potential suitor, such hurdles can be overcome or they eventually dissipate. For anyone truly desiring to acquire an asset like Mosaic, I can assure you a path to doing so would be found.
Another problem with the acquisition theory of the bears is that such a theory assumes that the market has assigned some sort of premium to Mosaic’s valuation in the first place. There was no such premium.
If anything Mosaic was cheaply priced to begin with. To cut 15% of market cap based on some sort of random assumption that an acquisition is no longer on the table is one of the more silly assertions I have come across.
More ludicrous is the idea that a sudden influx of shares would depress share price. The theory here is that the market would not be able to absorb such a huge amount of supply.
Well, I’ve got news for you. Every week this country sells a huge amount of debt on the open market. Despite concerns over our future ability to repay such debt a massive number of buyers appear week in and week out to buy our debt. The same thing will happen with Mosaic. When those shares become available, investors will willingly gobble up the supply. It happens time and time again. In this case, we have a story that is so profound there is simply no reason to think otherwise. To dump shares because of this fact is the definition of insanity.
Thankfully the market is indeed insane on occasion and that craziness presents opportunities to those willing to trade. Eventually, rationality returns and share price returns to normal. That will certainly be the case with Mosaic. Not only can traders pick up the quick 15% that was lost, but there is so much more to the story.
Global growth and need to feed the world with ever decreasing availability of farm land puts pressure to increase yields on current crops. That is the beauty of what Mosiac produces and that dynamic is what will make money for the company for many years down the road.
Currently, analysts expect Mosaic to make $4.09 in the year ending May 31, 2011. That number is expected to grow by 28% in the following year to $5.24 per share. At the current market price of approximately $78 Mosaic trades for just 18 times the 2011 estimate and 15 times the 2012 number. That is downright cheap given the 28% growth. My guess is the current assumptions are too low. Mosaic is likely to do better than current estimates in my opinion.
What happened last week was a blip — a blip that should be (and already is being) exploited by astute traders. The action simply made an attractive story a slam dunk. There is money to be made on the selling in Mosaic.
See all of my 10 Top Stocks for 2011.
