With the U.S. stock market continuing to defy bearish calls, it's hard to believe that opportunities remain out there. They do exist, but investors are going to have to be very selective and go against the grain.
Beyond the current intrigue in oil-related stocks amid the decline in underlying crude prices, another commodity industry has been scrapping along for quite some time now -- with share prices that have not gone anywhere.
I'm talking about the fertilizer space.
I believe fertilizer holds a very long-term strategic value all over the world, as it can maximize food production from an infinite supply of arable land. Thanks to a combination of healthy harvests and lower corn and wheat prices, farmers are currently doing what they have been doing for decades -- delaying fertilizer purchases. To some extent, thanks to enhanced seeds that are more resistant to disease and drought, there may be less of an immediate need to apply yet more fertilizer.
But I believe that, over a period of years, demand for fertilizer will pick up and prices should strengthen in tandem with that. Fertilizer companies typically respond to commodity prices: If corn futures climb, farmers become more optimistic about the profit they can earn, and they tend to invest in resources to maximize crop product. So Mr. Market, the forward-looking creature he is, will tend to send fertilizer share prices higher.
The long-term favorable outlook for fertilizer got a dose of confidence a couple of weeks ago, when ValueAct Capital disclosed that it had acquired a 5.7% stake in Agrium (AGU). Other major players in the space include the other big three -- Potash (POT), Mosaic (MOS) and CF Industries (CF). After the ValueAct stake disclosure, Agrium shares rose by more than 7%, yet shares are still down by more than 20% from their 2013 high of $115. We're seeing similar stories for the shares of other industry players.
It's worth noting that ValueAct is known to make few bets in high-conviction ideas, and to exercise a great degree of patience in seeing the value realized. Look no further than ValueAct's 13D forms with the SEC for the results: The positions reported here have reaped an average gain of more than 50%. So, for those keen on this space, ValueAct's new interest in fertilizer names is a significant development indeed.\