The world population continues to grow, which increased the demand for agricultural products; income per person, particularly in less developed countries, also continues to grow which should increase demand for meat (which is more agriculturally intensive since livestock must be fed agricultural products in turn). As a result many macro investors are bullish on farmland, agriculture, and related investments. Potash Corp. of Saskatchewan (NYSE:POT), a $34 billion market cap manufacturer of fertilizers, is one company often used as an example of a potential beneficiary of this thesis.
Potash Corp. reported a 9% decrease in revenue in 2012 compared to the previous year, representing a correction after two consecutive years of strong sales growth. Earnings were down significantly as a result of higher cost of goods sold and an impairment charge (even without that special item operating income declined by 22%). The stock has fallen 13% in the last year, which altogether has brought the trailing P/E to 17. Given the variability of Potash’s business, as can be seen from its sales performance over the last several years, investors would likely have to be confident in a longer-term trend towards higher earnings since the company cannot stand as a traditional value stock at current pricing. Analyst expectations for 2014 imply a forward P/E of 12.
The most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year, according to our analysis of 13F filings. We can also use our database from 13F filers to find some of the largest hedge fund positions in Potash Corp. as of the end of December. Renaissance Technologies, founded by billionaire Jim Simons, initiated a position of 1.4 million shares in the fourth quarter of 2012 (see Renaissance’s stock picks). Adage Capital Management, which is managed by former Harvard endowment employees Phil Gross and Robert Atchinson, increased its holdings to a total of 8.7 million shares making it one of the fund’s top five holdings by market value (find Adage’s favorite stocks).
Other providers of fertilizers include Mosaic Co (NYSE:MOS) and CF Industries Holdings, Inc. (NYSE:CF). Mosaic carries a trailing earnings multiple of 14. Its financials have been somewhat better recently than Potash Corp.’s; in its most recent quarterly report (for the fiscal quarter ending in November) sales were down 16% compared to the same period in the previous fiscal year but net income was actually flat. While over the long term earnings would decline if sales continued to fall, it at least suggests that the company’s costs are flexible. CF looks to be clearly in value territory from an earnings perspective, and its net income was actually up last quarter compared to the fourth quarter of 2011. We certainly wouldn’t endorse it as a buy until we took a closer look (and we would note that sell-side expectations imply a decline in earnings in the next couple years) but it may be worth further research.
