Here they go again: Just two years after fertilizer stocks peaked at remarkable highs, many of the same stocks are taking off once more. Should investors hop on board for a second run?
The previous runup saw Potash Corp. of Saskatchewan Inc. shares surge 185 per cent from mid-2007 to mid-2008, briefly giving the stock the biggest weighting within the S&P/TSX composite index. Back then, most of the rationale was based on shifting appetites in the developing world. People once too poor to add meat to their diets were starting to scarf it down. Animals need crops, and crops need fertilizer.
With the rebirth of the agriculture boom, which follows the bust during the financial crisis and recession, there are apparently many more reasons to get excited about fertilizer stocks. Corn harvests in the United States, the world's biggest corn producer and exporter, are down, encouraging farmers to spread the fertilizer more liberally.
As well, the price of natural gas is in the gutter, feeding dreams of greater profit margins, since gas is an important input into fertilizer production. And perhaps most important, virtually all fertilizer producers are seen as potential takeover targets now that Australia's BHP Billiton Ltd. has taken a run at Potash Corp.
With four reasons to get bullish on fertilizer stocks, it's little wonder that many of the key names have seen spectacular gains in recent months. Potash Corp., Agrium Inc., CF Industries Inc. and Mosaic Co. have each surged at least 60 per cent since the start of July, making them among the hottest names in the stock market.
If you're a value investor who prefers to buy stocks when they're cheap and unloved, however, none of this is particularly good news. Bill Doyle, Potash Corp.'s president and chief executive officer, has said that BHP Billiton's bid for the company undervalues it in a big way.
He might be right, but if the share price already reflects a four-part harmony of bullish drivers, it's hard to envisage where the next upward push is going to come from.
The problem with this second surge - a rarity in the stock market, which tends not to hand out second chances - is that the highs of the previous surge stand out as a reminder of how giddy things can get. Shares of Potash Corp., for example, are still 40 per cent, or $100, below their 2008 peak.
That implies there are big gains ahead if the share price hits new record highs. But can that happen? Analysts aren't much help here, given that they've tended to follow fertilizer share prices, rather than lead them. Their average target price on Potash Corp. was above $250 in 2008, then fell to about $125 after the share price descended into 2009. Their targets are now following the share price back up as euphoria kicks in again.
But euphoria is rarely good to investors. Anyone who had the misfortune of buying into the last fertilizer boom - or the technology bubble, for that matter - when the backdrop was glowing, paid a hefty price.