Fast Growth in 4 Fertilizer Stocks

09/14/2011 9:30 am EST

Focus: STOCKS

Kate Stalter

CMO & Senior Financial Advisor, Better Money Decisions

Fertilizer makers were among some of the quickest-moving growth names in 2006 and 2007. As the industry fundamentals have bounced back, these stocks are once again drawing institutional buyers, and some offer good potential for retail investors to profit by following in the pros’ footsteps, writes MoneyShow.com contributor Kate Stalter.

One of the sectors I’ve been tracking since last month is agriculture.

One sub-sector, in particular, has shown unusual price strength. With world population growing, so is the need for fertilizers to speed food production.

Many of the fertilizer makers have been outperforming the broader market, with some rallying to all-time highs in recent weeks. Mid-cap Terra Nitrogen (TNH) pulled back from its new high of $199.50, reached on August 31, and has found solid support near its short-term ten-day moving average.

I tend to use the 50-day line more often as an indicator of medium-term support that may offer a technical entry point. Terra Nitrogen has not touched its 50-day since early August. For the most part, volume was robust as the stock trended higher, a signal of investor confidence.

The buying strength is encouraging, but I would prefer to wait for a pullback with 50-day support before making a buy.

At this juncture, with the stock showing hefty monthly percentage gains from May through August, it wouldn’t be surprising to see a pullback as investors grab some profits after the big run-up. But the institutional conviction that’s been evidenced so far means waiting to buy on 50-day support could be a profitable strategy.

Another fertilizer maker that’s retreating from an all-time high is CF Industries (CF), Terra Nitrogen’s parent company. The stock rallied to an intraday peak of $192.70 on August 30.

Volume was light on the rally, which is not ideal. However, the move came in the days prior to the Labor Day holiday, which often brings lower trading.

CF’s earnings growth skyrocketed in recent quarters, with analysts eyeing profit of $20.92 per share—no, that’s not a typo—for 2011. That would be a gain of 143% over 2010. It’s not unusual to see explosive growth like that slow somewhat, so analysts expect 2012 earnings to come in at a not-too-shabby $19.34 per share, a year-over-year drop of 8%.

Of course, consensus estimates can be wrong on either the high or low side, but they can be useful as an indication of institutional confidence in a company’s near-to-medium-term growth potential.

NEXT: 2 More Strong Fertilizer Names

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A recent IPO from the agricultural sector is Texas-based CVR Partners (UAN). It’s a subsidiary of CVR Energy (CVI).

CVR Partners’ stock has been forming the right side of a base and is trading above its ten-week average. Upside volume has been heavy in the past couple of sessions, and the stock is approaching its July 21 intraday high of $26.10.

CVR Partners produces nitrogen fertilizers, exactly the type of product that analysts expect to enjoy strong demand in the coming years. As with CF, this company is expected to show triple-digit profit growth this year, with growth levels slowing dramatically in 2012.

Institutional owners have piled into the stock, a great sign of confidence, and a reason for individual investors to track the stock. It’s showing technical strength at a time when the general market has faltered, something that could indicate future upside potential ahead, as professional investors add to their positions.

CVR Partners is a mid-cap that trades more than 2 million shares a day. It’s not so large that explosive price gains are out of the question, yet it also has a decent amount of liquidity. That’s a good combination.

In addition, recent IPOs often sport large gains within their first ten years or so as a publicly traded entity, another reason to eye this stock closely.

The company currently pays a generous dividend yield of 7.5%. While there’s no guarantee that high rate will continue, it’s an attractive aspect of the stock at a time when fixed-income investments are paying lower yields. In addition, the stock’s one-two combo of price appreciation plus a dividend makes it worth a glance.

One of the tried-and-true large-cap stalwarts from the fertilizer industry is also showing price performance better than the general market. Potash Corp. of Saskatchewan (POT) is trending along both its ten-week and 40-week moving averages.

Drilling down to see how that appears on a daily chart, the 50-day is currently holding above the 200-day line, a good indicator. But the stock has had trouble gaining much upside traction in recent weeks, making some of its smaller industry peers more attractive, technically.

The fundamentals have been strong, however. The company has amassed an excellent track record of sales and earnings growth in recent quarters, and Wall Street expects that to continue over the next two years.

Potash, with a market cap north of $48 billion, trades more than 8 million shares a day, making it a very liquid large cap. Its trading character has shown some wider-than-usual price swings lately, in keeping with overall market volatility.

The fundamental history and future potential could make this an interesting play at some future date. However, at the moment, the technicals, while not terrible, are not compelling, either. I’d like to see upside conviction in a bounce above key moving averages. That could make the stock a technical buy candidate once again.

At the time of publication, Kate Stalter did not own positions in any of the investments mentioned in this column.

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