The period of seasonal strength in the fertilizer sector has arrived.
Most fertilizer stocks reach a seasonal low in the first week in July and move higher in two tranches that can last until the first week in January. Agrium is an example. The stock averages a return of 8 per cent between the end of July and the middle of September, followed by a 13-per-cent gain between early October and the start of January. Each period has shown a success rate of 75 per cent over the past 20 years.
The easiest way to invest in the sector is to own Global X Fertilizer/Potash ETF (SOIL-N). The ETF consists of the largest and most liquid listed companies globally that are active in some aspect of the fertilizer industry. Another alternative is to buy a basket of fertilizer stocks that are listed on either Canadian or US exchanges, including Agrium (AGU-T), Mosaic (MOS-N), and CF Industries (CF-N).
Fundamental prospects finally are improving. The sector has entered into a period of growth after an extensive period of deteriorating earnings. The second quarter is the peak period for quarterly earnings during the year. Consensus estimates show second-quarter earnings per share as follows for top companies in the sector:
Q2 Actual 2014 v. Consensus 2015
Agrium $4.37 $4.82
CF Industries 1.22 1.50
Mosaic 0.70 0.90
Potash Corp 0.54 0.52
(Source: Globeinvestor.com All estimates are in U.S)
Earnings gains are expected to come from higher fertilizer sale volumes and prices, partially helped by a bottoming of grain prices since the beginning of June.
The sector also is moving through a consolidation process. Potash Corp and CF Industries recently expressed interest in buying other companies in the industry.
On the charts, the sector has an improving technical profile. The long-term trend by the fertilizer ETF is showing signs of turning higher with price holding above a now rising 200-day moving average. Support is apparent between $10 and $11.
Accumulation of a basket of fertilizer stocks is recommended for a seasonal trade either through purchase of the fertilizer ETF or through the purchase of a basket of individual equities in the sector.
Don and Jon Vialoux are authors of free daily reports on equity markets, sectors, commodities, and Exchange Traded Funds. Daily reports are available at http://TimingTheMarket.ca/ and http://EquityClock.com. They also are Research Analysts for Horizons ETFs Management (Canada) Inc. All of the views expressed herein are their personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons ETFs Management (Canada) Inc.