Seeking Growth in the Fertilizer Group

 | Aug 19, 2011 | 6:16 PM EDT
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Even in the current market uncertainty, advisers and fund managers continue to run screens and perform research to identify stocks that have technical and fundamental potential. Dividend payers are also catching the eye of many asset managers.

Companies that produce fertilizers have seen their stocks defy the market downtrend, despite some fundamental and technical flaws in even the best price performers.

In any bear market, there are always industries whose price performance outpaces the majority of stocks. In this case, many investors who still take a long-term view of growth prospects in developing markets are holding their shares and have even been buying more.

As world population increases, so will demand for food; hence the confidence for the longer term in the fertilizer stocks. On a more immediate basis, rising grain prices contributed to the stocks' gains in recent sessions, as traders anticipated a corresponding increase in demand for fertilizer. In addition, high dividend yields have made some of the stocks appealing.

For example, Terra Nitrogen (TNH) currently sports a dividend yield of 9%. As of Friday, the stock was up more than 7% for the month, even as the S&P 500 has shed more than 11% so far in August. Terra Nitrogen is a master limited partnership (MLP) that's 75% owned by CF Industries (CF). The MLP was acquired when CF bought Terra Industries, Terra Nitrogen's parent, in April of last year.

Despite the solid price gains and hefty dividend yield, Terra is a stock to handle with care. It's extremely thinly traded, moving just 80,000 shares per day. Just as it has apparently moved up with ease during a market downturn, it can crash quickly if one big investor decides to unload shares.

In addition, it's always a risky to buy as the general market is in a correction. As we've had ample opportunity to witness lately, investors can change their minds quickly, tanking even stocks that had been attempting to rally. If Terra does pull back in the coming weeks, watch for support at the key 10-week moving average as a sign that most institutional investors are continuing to hold their shares.

Terra Nitrogen's majority owner, CF Industries, has notched a gain of 9% in August, as of Friday. The stock is trading at its best levels since June 2008. CF is North America's largest nitrogen fertilizer producer. The Illinois-based company has seen healthy sales and earnings growth in the past four quarters. Other fundamental metrics, such as return on equity and cash flow per share, are also strong.

Upside trading volume this month has picked up, but there are still some fundamental reasons to be cautious about CF. Wall Street is eyeing a decline in profitability in 2012, with some analysts concerned about effects of rising input costs on the firm's margins.

Recent IPO CVR Partners (UAN) is another fertilizer name that's showing solid price action in a down market. The Texas-based company, which uses petroleum coke to make its nitrogen fertilizers, went public in April. Its IPO shares priced at $16, above the company's proposed range. So far, the stock has held most of its gains, trading between $22 and $23 on Friday, hovering just below its 50-day average.

Like CF, CVR Partners is expected to show triple-digit earnings gains in 2011 but a slowdown next year. In the positive column, newer companies often sport better-than-average price gains in bull markets, making this a name to track in advance of the next broad uptrend.

Chilean fertilizer maker Sociedad Quimica y Minera (SQM) is getting better price support than other companies in similar businesses, such as Potash (POT) and Agrium (AGU). After dropping below its 200-day line last week, SQM managed to rally and is finding support at that key price line.

SQM has an ace up its sleeve that other nitrogen producers can't claim: It's the world's largest supplier of lithium, a key component of batteries used in consumer electronic gear. That segment of its business is helping to boost Wall Street's earnings outlook for the firm. SQM is expected to show income of $2.10 per share this year, an increase of 45% over 2010. The 2012 earnings gain is pegged at 26%.

While price support at moving averages during a downturn often bodes well for future gains, it's not a magic bullet. In addition, even solid fundamental performers which had previously seen some buying in a downtrend can reverse lower if market sentiment worsens. If you do choose to buy these or any stocks now, be acutely aware of the general market action and its potential to harm stocks at this juncture.

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volatility is quite low here, and we could see some downsides here in the short term. ...
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