Potash Corp. Looks Good on the Pullback

Late last week, the commodities saw a pullback due to the global gloom and doom theory posited by the paranoid and super risk averse. Due to this pullback, I think that a lot of the commodity names are looking very attractive right now, and I would recommend taking this opportunity to start/add to your positions in some of the big commodity names. One stock I feel is particularly attractive at these levels is Potash of Saskatchewan (POT).

POT is the world’s largest producer of fertilizer and produces 23% of the world’s supply. Interestingly enough, the company also controls 55% of the world’s unused supply, which it has strategically kept offline in order to keep fertilizer prices high. Does that tactic sound familiar? It should – it’s what the Saudis are doing to oil. That is why I like to think of POT as the Saudi Arabia of fertilizer.

I like POT because it is a great way to play the global agriculture boom. People around the world are eating more and better. The Chinese are starting to incorporate more protein in their diets in the form of soy. As a middle class surfaces throughout the emerging markets, demand for food will increase exponentially. POT is in prime position to cash in on this demand for food.

The global agriculture party- like the commodity boom in general – has been going on from quite some time now. But with the most recent pullback – from a 52 week high of 241 on June 19th to 210 today – has created a good opportunity to jump on the bandwagon.

Let’s Look at the Numbers
Potash is already up a lot, 163% in the last 52 weeks, but I still think there is room to run. The F P/E comes in at about 10.39 (10.78 – 10 depending on the analyst), which is very attractive for a company that the S&P predicts will realize a CAGR of 35% over the next 3 years. This $71 billion market capitalization company also sports a 26.86 % profit margin and a healthy current ratio of 1.45.

Why It’s Undervalued
I think POT is undervalued because of the recent pullback. I believe that the pullback is a result of some profit taking but is mainly due to a shift in expectations of global growth. There has been some recent talk of a global recession and the significant global demand destruction that will result from inflation combating central banks. While I think the global economy may slow from its recent historic steroidal growth, I in no way think that the party is over.

Conclusion
I like the agriculture sector and I like Potash of Saskatchewan, but the stock has run up for a while now. I would buy this one on the most recent pullback, but not all at once. More likely than not we have not seen the absolute bottom for POT, but I am comfortable starting to nibble at 210.

Also – never invest on someone else’s advice – do you own research... Domenic Strazzulla in Seeking Alpha