So was that good news or bad news that Potash of Saskatchewan (POT) announced this morning, April 28?
For the first quarter of 2010 the company reported earnings of $1.47 a share and revenue of $1.71 billion. Both numbers beat Wall Street projections of $1.32 per share for earnings and $1.48 for revenue.
Clearly good news.
But then the report gets confusing.
For the full 2010 year Potash of Saskatchewan told Wall Street to expect earnings of $4.50 to $5.25 a share. Now that’s hugely below the $5.52 a share of the current Wall Street consensus. However, it’s an increase from the company’s own prior forecast of $4.00 to $5.00 for the year.
Wall Street seems to have decided that the company is simply low-balling its estimates for 2010 so that it’s sure to beat them. That’s not an outlandish conclusion since company management was badly burned at the end of 2009 when earnings and sales repeatedly came in below forecast.
But I think some recent trends in the potash market could make these new numbers more than just gamesmanship from management. Potash prices have stabilized but they don’t look like they’re rallying the way Wall Street hoped (and still hopes.) And demand, while likely to climb 50% from 2009 levels to 50 metric million tons, according to the company, still doesn’t look strong enough to soak up all the supply in the sector. In its earnings release Potash of Saskatchewan said that it anticipates producing 7.4 million to 8 million metric tons. That’s still well below the company’s 11.2 million tons of capacity.
We “expect to initiate production curtailments for inventory control purposes over the course of the year,” the company said.
In other words 2010 will be what the company calls a transition year.
If you’re a long-term investor I suggest that you hold on through this transition. The stock remains in my long-term Jubak Picks 50 portfolio.
But if you have a time horizon of less than five years, I think your hold or sell decision will be determined by how rough you think that transitional year will be. In my opinion it could get pretty rough: This is a commodity stock and subject, therefore, to big swings with changes of sentiment on economic growth in the world’s emerging economies and with overall assessments of global growth.
I think the next six months anyway are shaping up as very uncertain on the growth front.
So I’m going to take advantage of the rally in the stock market today on optimism over a solution to the Greek crisis and sell these shares out of Jubak’s Picks. I have a 14.1% gain on the shares since I added them to the portfolio on July 23, 2009.
Full disclosure: I will sell my personal position in Potash of Saskatchewan three days after this is posted.
Will be interesting to know what the actual North American grain production will be this year. The corn belt has experienced a very wet spring and has a potential to reduce yields. In western Canada about 10 miillion acres that should have been planted at least two weeks ago may not grow anything – its too late. They only have about 100 days till the first frost, normally in early September. With an early frost the production hit of those acres in the already in the ground could also suffer. So I think you can expect lower production in NA and higher grain prices so look for POT to rise this fall. Till then sit tight.
I hope your right. I’m in at $148. Waited to hear what he had to say before making the plung. Thanks for the info!
taterbug,
IF Buffett was certain that Goldman had done what the SEC accuses GS of, then he would NOT want his image tarnished by it. Buffett has access to info you and I can only dream of, and I have no doubt he gave GS a full-body cavity search before investing $5 billion. If there was even the remote possibility of a skeleton in GS’s closet, Buffett wouldn’t have done the deal.
Mind you, I’m not saying Buffett is flawless. He makes plenty of investment mistakes. But I do believe he does his due diligence before buying anything. If any kind of criminal activity showed up, he would know it.
THAT is why I thought his comments would be supportive of GS.
How did this thread get on to GS? I mean I know they sell a form of fertilizer but really…….
kelvinator…writing puts on POT has also been very profitable. The thing I don’t like about writing the covered calls is that POT can run up tremendously and you will lose your shares. If you are going to risk your money here you better participate in the big moves when they happen! It isn’t like you are trying to protect a big dividend.
I’ve been writing/rolling covered calls on Potash every month or two, which have great premiums (eg ~ 5% return on June 110C – 35%+ annualized at current prices), so I think I’ll keep doing that, since that helps with a volatile/sideways/slightly down stock. I got the original position around 95 and that’s driven the cost basis down by $10 or more since last year so far…
actually, warrants good for 3 1/2 years still, but cost nothing to hold, and he gets paid on the preferred while he wait – i don’t think he’s exercised the warrants yet – couldn’t find online..
Ed-
I doubt that Buffett will sell, but he’s in a much different spot than you or any other common share holder – he’s a very long term holder, not a trader, and his sale would help kill the golden goose he bought during the crisis: preferred shares yielding 10%/year plus $5 billion in warrants still good for 5 years at $115 in what may be a wildly inflationary environment eventually. Those terms are likely to be golden even if Goldman’s business takes a meaningful hit for a year or two.
EdMcGon,
I agree that I would trust Buffet over any analyst. How are you keeping track of Buffet’s moves?
Do you have an indication that Buffett is going to give good news over the weekend? I usually agree with a lot of your investing tips but having a hard time with this one. If he gives a sell GS may go under $100. That’s a lot of coin to lose on a chance? You don’t usually seem to be such a risk taker. I, on the other hand, seem to be throwing money away all the time on risk.
taterbug,
I did. And I set another buy order for $135.
For me, the key indicator on GS is the “Buffett Indicator”. If that changes to “sell”, I’m outta there! Otherwise, I’m in it for the long term.
Ed, looks like you bought it! Happy?????
taterbug,
At LEAST $200. I’ve heard a few analysts throw around significantly higher numbers than that. The lowest target I’ve heard was $185.
I know BofA/Merrill dropped their rating on GS because of the criminal investigation. Personally, I’m waiting to hear what Buffett has to say about GS on Saturday at the Berkshire meeting. That carries a bit more weight for me, although the fact that he hasn’t sold GS yet speaks louder to me than anything a stock analyst would have to say about it.
Right now, I’ve got another buy order on GS if it hits $150. That’s just too cheap to pass up.
Ed, what’s your price target for GS?
andante,
Not so fast on GS. Now they’re talking about a criminal probe of GS by the Justice Department. Mind you, I’m not selling on that news, because the investigation is only in the preliminary stage, and is undoubtedly being motivated by politics. But it will mean a temporary PR hit for the stock.
Just more justification for Congress to pass the financial reform bill, which GS likes…
For you latecomers, this may be another opportunity to hop on the GS train before it leaves the station. For those of you who don’t believe it’s a good buy, ask yourself: Why hasn’t Warren Buffet sold his stake in GS yet?
Think I’m going to hold on to my shares….I’ve got nothing but time. If it goes back to the high 80’s or low 90’s I may even buy more.
So what does this mean for Yariy…
Oh, Jim! You are going to like this move almost as much as your buy of Ormat. Potash is an excellent core holding commodity play for any portfolio. I think you are being too analytical here on a short term basis. Commodity stocks like this are hard to forecast to be sure, but the upside to this stock is far greater than the downside and a takeover is a real possibility. I could see taking a little off the table if you had a large position with a profit but that should have been done at $128 in any case. What happened to your case for long term world food demand? You cannot eat gold, copper or iron ore but you do need potash to grow food. POT is in the buy range at the moment although at the higher end of it ( $95-110). By the way, I did studies for a major fertilizer company in Canada. There is a correlation between fertilizer prices and grain prices, esp corn prices with a lag of three to six months if you want to try short term forecasting.
Do any of you believe hopping on Monsato right now would be a good idea if you still wanted to play fertilizer? Someone previously posted it was at a 52 week low.
Jim,
Are we not at that point where stocks (commodities for most) maybe over bought?
And what do you think a good over sold entry point for Pot could be?
Jim, I hold AGU and the price of the stock has fallen lately. Should AGU also be sold now on the outlook for fertilizer demand or are there other factors at play for this stock?
NY Post reports that GS will settle with SEC rather than endure a court trial with a jury that would be ready to convict. Stock should rally here. Get out your calculator Ed, your in the money. The analysts have a price target of $175-200.
coreymcgaha,
From Jim’s analysis, I think your strategy would be ideal, but for me, I don’t know if I’ll be nimble enough to buy it back at the right time later this year. But I agree POT is great long-term with a solid trend behind it.
I’m going to sell my POT shares now and lock in some profit. But, for the rest of 2010, I’m going to be watching carefully for a chance to re-buy POT at a low basis for the rest of 2010. I would love to rebuy at around $85 – $90. I think it is a great long-term investment even if there is a “transition” period coming up.
Is there a correlation between fert. stocks and food/grain etfs (dba, RJA, moo)?
Jim-How about an update on YARIY.
TKU
Thanks for your post, Jim. But I’m long POT and still conflicted about selling. If 2010 is a transition year – and so 2011 will be materially better – wouldn’t investors start looking ahead toward the end of this year and start bidding this up. I know overall global economic growth is a key factor, but US growth will seem to have progressed to a certain point by late 2010 and early 2011, and so US farmers will start to apply more fertilizer. My horizon is about 3 years, so I suppose selling some POT now but keeping some also would be a reasonable compromise. What does everyone think?