If you're a trader, you have to watch fertilizer stocks.
It might sound like a boring business: produce the stuff that makes crops grow. But it's difficult to find a more "boom and bust" sector anywhere in the market. On any given week, shares of a fertilizer company can rise 5% to 10%.
Let's take Potash of Saskatchewan (NYSE: POT, Stock Forum) for example.
POT is the world's largest producer of potash – a type of fertilizer. Back in September, it saw its stock drop 12% after lowering its earnings estimates. In January, management reduced earnings estimates again... and the stock dropped another 20%.
Then in March, POT raised its earnings estimates. The stock shot up 16% to a new 52-week high. Take a look at the roller-coaster ride shareholders have taken over the last year:
Here's the thing: I think shareholders are in for another jump higher. And if you're a trader, you should be on board. Let me explain...
The long-term growth story for potash – and any kind of fertilizer – is simple. The world population is growing. Those people will need food. To produce that food, farmers will need to buy billions of tons of fertilizer.
However, in the short term, supply can sometimes get out of whack with demand.
For example, in 2007 and early 2008, the prices for corn and other grains were soaring, demand for potash was strong, and inventory levels were low. Potash prices hit record highs, and most fertilizer stocks saw gains in excess of 200%.
But in late 2008 and into 2009, demand collapsed. Potash imports increased (creating more supply) and the credit markets froze everyone out, including the farmers, leading to fewer fertilizer purchases. Potash prices plunged almost 50% from record highs, and most fertilizer stocks – including POT – fell more than 60%.
Today, things are back on the upswing. According to Goldman Sachs, potash inventory levels declined for four straight months and remain more than 15% below the five-year average.
More important, demand is surging. POT said potash shipments are at "record" highs. In fact, the company already sold more potash in North America in the first three months of the year than it did in the first eight months of 2009.
Low inventory levels and strong demand mean higher prices for potash. This is why Potash of Saskatchewan raised its earnings estimates for next quarter by 70%. It's also why I believe fertilizer companies make a great trade right now.
Besides POT, other large-cap potash producers include Mosaic (NYSE: MOS, Stock Forum) and Agrium (NYSE: AGU, Stock Forum). If you want to be conservative, the Market Vectors Agribusiness Fund (NYSE: MOO, Stock Forum) is a reasonable choice. Its top holdings include POT, MOS, and agriculture/food companies Monsanto (NYSE: MON, Stock Forum) and Archer Daniels Midland (NYSE: ADM, Stock Forum).
I wouldn't wait too long to get in. Analysts have just begun raising estimates. Hedge funds love to pile into this "boom and bust" sector. In the case of a general rally in stocks, fertilizers will lead the way.