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Entry for September 30, 2008

Below I've cut/paste an article by Gary Dvorchak on The Edge today. His analysis clearly mirrors my own, so I thought I'd share his thoughts with you.

By Gary Dvorchak

One group I just can't figure out is the fertilizers, notably Mosaic (MOS) and Agrium (AGU). OK, OK, I know the story — commodities are over, the bubble has burst, the economy is collapsing, blah, blah, blah. The thing I can't figure out is if these things are so obvious, why is there not a single analyst willing to cut estimates on these stocks even a bit?

Blithely ignoring all the erstwhile evidence, not only are analysts not cutting estimates, they have the gall to raise them!

Look at the contrast of stock action vs. estimate changes:

Mosaic Price Performance vs. 2008 Estimates
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Agrium Price Performance vs. 2008 Estimates
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Source: Aviance Capital Management

Perhaps the industrial economy is at risk, but is the farm economy? Are all those hungry Chinese and Indian middle-class consumers suddenly going to stop eating? Corn, wheat and soybeans are off their highs, to be sure, but they are far above year-ago levels.

Soybeans, Corn and Wheat
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Source: CIBC World Markets

Similarly, prices for the principal products are up massively this year; presumably, a meaningful decline would still leave prices far above year-ago levels and long-term averages.

Potash, Ammonia and Urea
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Source: CIBC World Markets

The farm economy is flush and farm land prices are firm, so farmers can afford to pay higher fertilizer prices. Right now, Mosaic is trading at 4.6 times the forward 12 EPS estimate; Agrium is trading at 4.8 times. Clearly, the buy side is saying there will be massive cuts in estimates, but the sell side is not cooperating. Absent a total collapse in fertilizer prices, these stocks will not stay at these valuation levels.

I have been wrong on these stocks over the last few months, yet my discipline says these are screaming buys. I completely respect the charts and the bear story. Perhaps they are not "back up the truck" buys, but worth dipping a toe in.