Fertilizer Stocks Should Rise Again

Stocks like Mosaic and Potash were among the worst performers in recent months but now possess both good value and technical merit.

AS SEASONED INVESTORS KNOW, the leaders of the last bull market are typically not going to be the leaders of the next one. But that doesn't mean they can never do so and fertilizer stocks are presenting a rather attractive risk/reward scenario once again.

Before looking more closely at this sector, I must say upfront that we are far from being in a bull market. However, as the market heals and transitions from bear to something more positive, there are going to be tradable rallies -- and declines -- along the way.

If last week's positive action marked the start of one of those rallies then the goal for chart watchers is to identify emerging leadership areas. And it turns out that one of the superstar groups of the last bull market - fertilizer stocks - happens to be among them.

As a sector, fertilizer stocks have gotten absolutely crushed during this year's market debacle. And while the broad market peaked just over one year ago, these stocks continued to move significantly higher until peaking in June. But as the saying goes, the bigger they come, the harder they fall and these once high-flying stocks fell very hard, indeed.

Potash Corp of Saskatchewan (POT) is an example of just how far they fell (see Chart 1). From its closing high of 240 on June 17 to its lowest close under 64 last week, this stock was pummeled for a 73% loss. Contrast that to the Standard & Poor's 500 and its top to bottom loss of 46%.

Of course, just because something is so far down in price does not mean it is cheap. But Potash has been showing several areas of improvement from a change in momentum to a change in its supply/demand picture.

For example, as it was setting lower lows over the past two months, such momentum indicators as the relative strength index (RSI) were setting higher lows. When price action and momentum readings diverge like this it is often a sign that the decline has run out of power. That sets the stage for a rebound.

Volume readings have also shown quite a change in recent weeks with average volume doubling from roughly 10 million to 20 million shares traded daily. Such a surge is often a precursor to a change in trend, as well.

To be sure, the major trend here remains down so conservative investors have no real impetus to jump back in here. However, its fundamental story remains sound (see Weekday Trader, "A Wilted Fertilizer Stock Can Sprout Again," October 28) and its technical underpinnings are greatly improved to make this a top candidate to run in whatever short-term rally the market gives us.

We can substitute almost any peer stocks for Potash, including CF Industries Holdings (CF), Mosaic (MOS), Sygenta (SYT) and several others as all have very similar charts.

Another fertilizer stock that looks interesting is Scotts Miracle Gro (SMG), although this company does not operate in the same circles as the others. Scotts makes lawn and garden fertilizer and care products so its story is not the same as Potash and the agribusiness group. Regardless, the stock has several characteristics that make it a good leadership candidate.

The most important feature on the chart is the fact that the stock did not set a lower low in October when the market cracked (see Chart 2). This is an important point as we can say that investors did not dump shares in a panic as they were selling almost everything else last month.

A higher low is the first step in changing the trend from down to up. A move above the longterm declining trendline drawn from the February 2007 alltime high would be the second. Currently, that trendline is near 28, where not so coincidently sits it's widely watched 200-day moving average.

Scotts is well on its way towards recovery, but as with any stock in the current environment general market turmoil can kill a fledgling rally. But if the market does indeed embark on a multiweek rally, Scotts looks as if it can be among the leaders.