I Love Fertilizer Stocks, but...

I fear speculators more.

I have noticed a few things over the years... first, analysts who are often wrong are always conservative. They protect their hides. They rarely make calls ahead of the curve. And rarely do they make calls the week of earnings. On Tuesday, we had a downgrade of Mosaic by Citibank a few days before earnings. This is very curious and does not fit the pattern of ultra conservative analysts.

Shares of fertilizer company Mosaic Co. fell Tuesday after a Citi Investment Research analyst said there's a chance that fiscal third-quarter profit may miss Wall Street expectations.
Citi's Brian Yu, who expects earnings of 83 cents for the quarter, says there's a chance Mosaic's results will miss the average estimate of analysts polled by Thomson Financial. Analysts currently expect 95 cents in earnings for the quarter.
Yu says phosphate profit will likely decline from the year-ago quarter, on seasonally lower shipments and higher ammonia and sulfur input costs.
Now, nothing is foolproof or 100%, but usually an analyst will stick out their neck like that they know "something". Now let me be clear - the long term is bright, as bright as any company in the stock universe. Let me also say I believe all input price increases will be passed on to customers.

But let me also be clear that as each quarter passes, more and more people who know little about fertilizer pile into the space because it's hot and sexy. So the risk increases massively. Especially around earnings season; akin to solar in the latter part of 2007. So purely as a risk aversion I am going to cut back my exposure in Potash and Mosaic going into this Friday's earnings. Not because of anything to do with the fundamentals or "natural gas input pressure," but because I believe the probability exists that many people who piled into these stocks the past 3 months have a propensity to panic over any whiff of perceived (not real) bad news. So we might get a buying opportunity. This actually happened last quarter when the "selloff due to natural gas costs" lasted all of a few hours.

Further, I am breaking multiple rules by loading up on this stock (Mosaic) ahead of earnings. First, I hate earnings because people overreact, so I try to limit risk (giving up potential upside) by lowering exposure on almost any stock going into earnings. Second, the ag stocks are not acting well of late - have to respect that. Third, Mosaic is trading below 50 day moving average (could change by Friday). Fourth, the above-mentioned "analyst rule."

Again, aside from the stock you need to know the herd you trade with. I know the herd that has now moved into fertilizer stocks. They shoot and ask questions later. This is the same herd that decimated solar stocks to the tune of 60%+ losses in the past few months and the same herd which shot Apple (AAPL) to the tune of 40% after stellar earnings because the guidance was "not enough" despite always conservative guidance that they smash regularly.

The same herd killed Crocs; the same herd killed Google (GOOG), the same herd... well you get the idea...So I am going to spend the next day reducing exposure (I just began the past 15 minutes) and I'll let the smoke clear... I might miss a big move up, but I need to put personal beliefs about the long term fundamentals aside and protect capital. I took a big hit in Apple, in a stock that was unfairly beaten down. But there is no "fair" in the stock market - just emotional reactions and lots of momentum traders who could care less about fundamentals.

Again it's not the news, it's the reaction to the news - good news is already baked into this sector - see Monsanto.. fantastic results, but a sell off. So for a temporary respite going into Mosaic's Friday earnings, I am changing course and will reduce exposure. I expect tremendous numbers Friday and later in the month with Potash (POT). But I could also make a very easy case that someone will find something to complain about and say "the story is ending", and cause a sell off. So its a bipolar outcome - it could go either way. And that is gambling, not investing.

Unfortunately this is the market we are in, in this era - where the long run means "next week", and shooting first and asking questions later in is the norm. Earnings season is a minefield. So I don't want to give up weeks of good returns by an overreaction by the "herd". I Just want to make that clear since I have been, am, and will continue to be one of the biggest proponent of (especially potash based) fertilizer stocks, and the agriculture trade in general.

This is a very short term move to simply reduce risk to (potential) shareholders. It does not mean the stocks cannot gap up and run 25% after an incredible earnings report. But it is not worth the risk to me to give back a lot of return by being overweight going into earnings. I'd miss some return but losses are harder to make up than "lost opportunities". We'll re-assess after we see the reaction to the news Friday. But I will be back, in scale, soon enough - even if it at higher prices post earnings. A temporary respite - until then I play with such lovelies as homebuilders ;) [Apr 1: A Kool Aid Trade - Adding Homebuilder Exposure with Lennar]