Late Bloomers Look Ripe

 | Mar 29, 2012 | 10:00 AM EDT  | Comments
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Stock quotes in this article:

aapl

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goog

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pot

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mos

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cf

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atpg

As is often the case, the current market advance has left some companies behind. Last year, financials underperformed an otherwise flattish market, yet so far this year they are big winners. Identifying market laggards can be an effective way to invest before the market has a change of mind. In doing so, one is often buying in at a much more favorable price that minimizes the downside and opens up a lot of upside potential.

Because of Apple's (AAPL) continued historic share performance, the technology sector has performed very well in 2012. But that's because as Apple shares become more expensive, they have a greater effect on the performance of the respective indices to which it belongs. Apple shares are up more than 50% in 2012, while the Nasdaq is up nearly 20%. Yet Google (GOOG) shares haven't done anything in 2012 despite the fact that the company continues to grow its share of the online search market and the advertising fees that come with that dominance. While the share price isn't going up, profits and cash flows are, and it's only a matter of time before the latter starts to have a positive effective on the former.

Fertilizer giant Potash (POT) is up about 10% so far this year, in line with the S&P 500. Yet rivals Mosaic (MOS) and CF Industries (CF) have performed significantly better. Potash is the largest fertilizer company in the world. More to the point, Potash is the lowest-cost producer of its namesake product, the best competitive advantage possible in a commodity business. Because corn prices have fallen back a bit, so have shares of Potash. The market justifiably interprets lower corn prices as a sign that future farm profits will decline leading farmers to curtail fertilizer spending.

But the view needs to be bigger than that. Fertilizer demand can only increase as demand for food increases. A handful of companies, including Potash, control the vast majority of available potash reserves. There is no viable commercial substitute to fertilizer on a commercial scale. And at a market cap of $39 billion, the company is deeply undervalued. If someone wanted to buy Potash today and all the assets that come with, including significant equity stakes in some of the world's most strategic fertilizer companies, I doubt it could be done for less than $60 billion. Just this morning, analysts upgraded Potash to Buy from Hold.

ATP Oil & Gas (ATPG) could turn out to surprise investors again. Shares are trading for less than $8 as liquidity fears over the past couple of quarters sent investors rushing for the exits. While today's high oil prices are diminishing those fears, ATPG is an asset-rich company whose equity value could be worth multiples of its current price. The company's $1.5 billion in bonds due May 2012 have rallied nearly 20% in the past two months, as those liquidity fears appear overblown. If the bonds continue to rally, the equity will be next. ATPG is a much more levered company than it was a couple of years ago when I noted its merits when it was trading around the same levels. Shares fell further, but then advanced to more than $15. It's a different capital structure today, but that could be a lightning rod for the shares if the oil price remains elevated.

Some of the best investment gains occur when you arrive before the market does. Of course, being early always has to be measured against the risk -- defined as loss of capital and not beta -- that is assumed.

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