Though the market has entered its usual pre-Fed heel-cooling period, the fertilizer stocks have been a spark today, gaining after an upgrade from Merrill Lynch analysts.
Steve Byrne upgraded shares of several names, saying that “fertilizer fundamentals are nearing a bottom, given nitrogen and phosphate prices have already plunged through breakeven margins for marginal producers, triggering significant shuttered global capacity.”
Among those upgraded, shares of Mosaic Co. gained 8.8%, while Potash Co. of Saskatchewan was higher by 6.5%, Intrepid Potash rose 5.4%, and Terra Industries gained 11.6%. Those stocks were all raised to buy recommendations by Merrill, citing the longer-term supply-and-demand outlook, the sharp decline in valuation as a result of the share sell-offs this year, and “attractive acquisition opportunities.”
Mr. Byrne believes, however, that fertilizer prices could continue to sag in the near-term, due to larger-than-anticipated inventories after demand dried up. He also notes that Terra and CF Industries (which was upgraded to neutral) are both more than 10% owned by hedge funds, and while deleveraging has been responsible for some of the decline in these shares, they could be further impacted by more selling from those investors.
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