I just thought of some interesting ideas about POT, and why it is being sold on a huge scale despite great earnings and growth potential. (this is a bit wordy, so bear with me)
One of the first rules of investing is that you should identify the reason you bought an investment. And as soon as that reason disappears or fails to materialize, its time to get out with cash in hand and re-evaluate from the sidelines.
So how does this apply to POT?
Well, when the Energy Policy Act of 2005 was passed 3 years ago, it created a market overnight for Domestic Fuel Ethanol. Government vehicles were required to increase their ethanol usage, tax breaks were given, and market regulators were established to help build the infrastructure needed to create a Domestic Fuel Ethanol Production system.
If you were smart back then you would have realized that:
Higher demand for Ethanol leads to higher demand for corn, which leads to higher prices for corn, which created demand to produce corn, and to increase yields of current corn farms. This increased the demand for fertilizer and created much higher revenues for producers like POT. This was the old Paradigm for POT buyers.
You would have been smart indeed. At the time, POT was trading in the mid $30s. But then, gas was cheap. Ethanol was an environmentally friendly alternative, not a cheaper one. Ethanol was only surviving because of the Energy Act. So POT stayed below $50 for a few years until 2007 when, as we all know, gas shot up. Since Ethanol is a substitute and a federally mandated ingredient in highway fuel, its price shot up as well. Following the economic chain I highlighted before, this made POT a very attractive place to be. People started buying and it became intrinsically tied to oil. The more oil went up, the more people hedged their bets by buying up on POT. Eventually this drove the price above $200, a 400% increase over its early-2007 price.
This leads me to a simple conclusion about POTs performance in recent weeks, based on the rule I mentioned above. People got in because of Oil and Ethanol. And now that those towers are crumbling, they (as smart investors do) are pulling out.
On the other hand...
I don't like quoting numbers, because the numbers from this company say it should be in the $300s. But guess what? its not. Needless to say, for this company, in this economy, they are astonishing.
And what people are slow to realize is that the great numbers today are not due to the lagging effects of Ethanol, but instead due to the increase in global demand. The world is picking up where Ethanol left off. In some ways the global demand has probably been more responsible for the price increases for bulk Potash, not Ethanol. The American investors were right to invest in POT, but for all the wrong reasons.
What POT needs is a new crop (no pun intended) of investors who re-evaluate this stock as a global fertilizer play, not an oil play, or an alternative energy play. I think the problem now is that people are uncertain of what POT is. It has the interesting characteristic of being driven up by expectations of Alternative energy profits, but instead achieved its lofty value by completely unrelated means. I think its an amazing coincidence that has a lot of people scratching their heads.
If you look at global fertilizer prices, it correlates quite nicely with POT's rise. That might lead you to think that global fertilizer caused the upswing.
People who have traced the rise in global fertilizer prices to the rise in POT will think themselves smart to see the connection and will buy it up based on lofty valuations, and naturally be very alarmed that it is dropping rapidly.
People who know this stock popped up because of Ethanol and Oil will think that since those commodities are falling, that POT's price, and future outlook will also go down the drain. They consider themselves smart to get out before the fall, no matter the cost.
I think they are both wrong. I think we are in the midst of a grand coincidence.
It will turn around. The public perception needs to shift from POT being the cash machine of the Ethanol market into being the cash machine of the global fertilizer trade. A position which pays better and has much better job security. And either way, you cannot argue, that given current prices, and the cost of production, POT will be making more cash then they know what to do with.
It might happen any day now, or it might take a while. But one thing I can say for sure is that in 3 months POT will produce stellar numbers again, and it will be hard for anyone to point their finger at anything but global fertilizer.
And if it hasn't started running by then, it will.
$178.92 (08/07/08)
