When stocks move, they tend to move in groups and nowhere has that been more apparent than in the fertilizer group.
The leading price performers in the fertilizer sector are CF Industries (CF) and Terra Nitrogen (TNH). Both stocks have been running higher for a while and showing signs of accumulation along the way, but they did not participate in Wednesday's rally. They're also extended past proper entry points.
Terra Nitrogen came off its highs recently in heavy volume. Shares rebounded Tuesday in soft volume then fell 0.7% to $186.30 on Wednesday in heavy volume. The stock continues to hold above its 10-day moving average at $183.06. The next potential support level is its 20-day moving average at $174.21.
CF Industries is also holding above support after recent price strength. Shares underperformed Wednesday, falling 1.3% to $183.24 in soft volume. I consider CF Industries to be more of an institutional-quality stock than Terra Nitrogen.
Two other high-quality names in the group are in decent technical setups and could see more upside ahead. The group lagged as a whole on Wednesday, but that doesn't mean it can't outperform going forward.
Potash Corp. of Saskatechwan (POT) could soon try to take out its recent high of $59.84, which would increase the odds of an eventual breakout above $62.80. Breakouts need volume to work, and I haven't seen much conviction behind the buying in Potash in recent weeks. Some heavy-volume price gains in the coming days would enhance its current technical picture. Shares of Potash closed Wednesday at $59.53, up 0.8%.
In the second quarter, Potash reported profit of $0.96 a share, an 86% increase from a year ago. Sales jumped 62% to just over $2.3 billion. For the current quarter, analysts see POT's profit rising 109% year over year to $0.92 a share with sales up 37% to $2.15 billion.
Meanwhile, Intrepid Potash (IPI) recently broke out above $34.38 and looks solid. The company is one of the largest producers of potash in the U.S and also markets another type of potash fertilizer produced from langbeinite ore. The company serves agricultural, industrial and feed markets.
In the second quarter, the company reported strong earnings and sales growth. Earnings jumped 640% from a year ago to $0.37 a share, while sales grew 86% to $119.4 million. For the current quarter, the consensus estimate is for earnings to rise 125% to $0.36 a share with sales up 28% to $106.8 million.
The bottom line is that fertilizer stocks should continue to benefit from strong demand as farmers grow more food for more people. Fertilizer prices have been strong thanks to rising demand for food grain from emerging economies. In addition, increased demand for biofuels, such as corn-based ethanol, should also drive demand for more fertilizer.
The fertilizer group has been no stranger to merger and acquisition (M&A) activity in recent years. It's still a fragmented industry, which means there could be more consolidation in the future.
In Feb. 2009, Agrium (AGU) bid $3.9 billion for CF Industries, but CF Industries rejected the offer. Then in March 2010, CF Industries agreed to acquire Terra Industries for about $4.7 billion.
In August, 2010, BHP Billiton (BHP) made a hostile $39 billion bid for Potash Corp. of Saskatchewan, but withdrew the offer in November after the Canadian government refused to endorse the deal.
While leadership is strong in the fertilizer group, the underlying market health is still questionable due to a lack of volume on up days.
On Wednesday, for example, the Nasdaq jumped 3%. Volume totaled nearly 1.8 billion shares, above Tuesday's level of 1.7 billion, but below its 50-day average volume of around 2.1 billion.
I hope that new money institutional money starts to come in from the sidelines soon. If it does, the rally could have legs. If not, the foundation will remain shaky.