Monday, August 4, 2008

The Potash story

June 9, Goldman Sachs upped POT target to $285
June 19, first Boston raised POT target to $280
June 19, RBC capital raised POT target to $340, on July 18 they raised target to $370
June 20, Merrill Lynch raised POT target to $300
July 9, BMOC raised POT target to $335
July 25, First Boston raised POT to $280

Today Potash closed at 180.14, down over 20 points on the day.

The fertilizer "story" is over. July was the worst month for commodity pricing in years. Corn prices have been shellacked. Pricing in fertilizer is next.

Two weeks ago, I said Sell POT when it was $213.

On July 23, before POT reported earnings, I emphatically said SELL it:

And if the earnings are good? SELL it. And if the CEO says good things? SELL it. And if they say pricing is still tight? SELL it. And if he says this is a multi-year run in fertilizer? SELL it. And if another Wall Street shill comes out with another $340 target on Potash? SELL it.

That is how Wall Street works. They sell a story, and then they tout it. Then they get naive management to believe their own story, and management levers up to buy the stock:

We purchased 7.5 million shares for cancellation in the second quarter, in addition to the 3.4 million shares repurchased in the first quarter. By the end of the second quarter, we had purchased approximately 10.9 million shares under the repurchase program at a cost of approximately $2 billion. We temporarily increased available and outstanding borrowings under our short-term credit facilities to accommodate accelerated buying in the second quarter...

But now, POT already did their buyback. Who is going to support POT now? This is when the stock cracks to the downside, when Wall Street no longer cares about the story.

Do the math. The stock is rolling over on the charts. Go to and look at the institutional ownership in POT.

Increased positions in POT were 28.8 million shares.
Decreased positions in POT were 35.8 million shares

A difference of 7 million shares.

POT bought back 7.5 million shares in Q2. They bought back the stock Wall Street was selling.

So do you think new buyers are going to be so emboldened to step in and pick up POT?

Apparently not today. It was down 20 points.

The chart now looks broken, and every rally is a sell. But I'd limit my risk by using put options when I'm playing this game.

What's POT worth? Look at Wall Street's target prices above and then average them.

You'll get 308.

When Wall Street loses confidence in the "secular" story, they'll just crush the multiple. And the PE compression, is far more damaging than any earnings growth POT can possibly manage. That's when the stock just craters.

So how much do we discount their average price target of POT?

Well let's just take a look at Mother Merrill and their AAA CDO's. I suppose a few years ago, Merrill Lynch actually believed these were worth 100 cents on the dollar. Maybe these analysts actually believe their price targets also. But what we do know is that before Merrill Lynch sold their AAA CDO's to Lone Star, they had been pricing them at .36 on the dollar.

What if we apply the same cynicism of which Wall Street has used upon themselves? It's the same game, just a different twist on the story.

If I take 36% of 308, I get a price target of 111.

You buyers of POT better make sure you know the story, and not know just the story that Wall Street is selling!

I'm not buying it!

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