The Mosaic Company (MOS): It's a Spinning Wheel

What goes up, must come down. Spinning wheel goes round and round. Yes those great lyrics from the Blood Sweat and Tears classic, Spinning Wheel definitely apply today.

We are indeed enduring blood, sweat and tears as the markets spin out of control to the downside. Where will it end is anybody's guess.

One of the more interesting sectors to watch is the agriculture space. Fueled by intense speculation of world growth unabated accompanied by alternative energy dreams investors pushed shares of fertilizer companies to nosebleed territory.

Here we go again.

New paradigm talk led the vulnerable to believe that these stocks could go up in value forever. Investors plowed in to the space with eyes wide shut.

Ironically, the agriculture and fertilizer sector were previously known as defensive stocks. In other words, don't expect growth here. Instead, you could own the space with the certainty of knowing that shares would not be volatile.

Unfortunately with the new paradigm, fertilizer stocks have been most volatile. Our stock of the week, The Mosaic Company (MOS) has seen the value of its shares move from the mid $50 range to a high of $163 to a low of $34 today.

Talk about a roller coaster.

The boom was initially triggered by the global growth story. Demand for food fed interest in crops and crop yields. With limits on available land to farm, interest in fertilizer exploded.

These were fertile conditions for stock appreciation, but little did investors know what was in store. Oil prices shot through the roof and with it demand for alternative sources grew with it.

Specifically the ethanol story pushed fertilizer stocks to their highs. The move was fast and furious. Ultimately the move was not sustainable.

Lower oil prices pricked the bubble. Now, that bubble is entirely deflated. Is the move an over reaction? Is the new paradigm over?

Here are two opinions worth listening too:

The Bull Case - Don Moncrief

In times of rough markets, any stock is a gamble. When your stock is in a sector that is just being creamed, that just increases the gamble. But, by the numbers, Mosiac is due to rebound nicely.

First, let's examine the market it is in. It is a producer of agricultural products, namely potash and phosphates, used for fetilizers and animal food products. At least that is the bulk of what it does.

Since people and animals have to eat, it would seem the business will provide needed products, even in a financial downturn. Let's hope so, or a lot of us will be going hungry.

Mosaic is down significantly this year. It stock price has quartered since reaching it's 52 week high just a few months ago. It is now bouncing along a 52 week low. Since it is a sound business, that does put near the buy.

Since it is a sound company in a vital market segment, why not a buy right now? Simple. The markets will go yet lower. The global financial turmoil can do nothing else but cause more market drop.

It's major competititor is Potash. Another good company. It too is taking a beating right now. Both companies have sound profit margins (20+%), so about the only reason for the beating the stocks are taking is the global selloff of stocks in general. I think they should survive the demand destruction better than many sectors.

Look to buy with the Dow around 10,200. That may not be the bottom for the Dow by any means, but it will get you a hard to beat price you can be happy with.

The P/E is ridiculously low, under 3. I would like to see a better dividend, and have not ruled that out in the future, as many companies may be increasing dividends to maintain shareholder value. An improved divided may be a couple of years off yet though, as liquidity is going to be foremost on the mind of companies for many years to come.

Normally, I like company charts, and what I see in the charts would scare off the bravest of investors. The chart on Mosaic is not really worse than most others right now, but the spiral down has been more obvious than for many other companies.

What is safer than Mosaic? I still like Terra Nitrogen (TNH). Still in the ag fertilzer market, but the dividend on TNH makes it a superior buy in this kind of a market.

Things on the horizon for POT, MOS, and TNH? I think they will learn from this devaluation of their stocks, and rather than have stocks in the $150-200 per share range, when they get close to those, they will have stock splits. While they have no real effect on the stock value, it does give the opportunity to have more shares at work, even if you do divest a few shares over time.
As long as the company maintains a good profit, that can only be a good thing.

Mosiac is a wait right now. Mostly, for the other shoe to drop in the Dow, not because it is a bad company. It is a good gamble though, even if you feel compelled to jump in before the bottom, I don't think you will suffer too badly.

The Bear Case - Jim McDowell

Mosaic Company (MOS) has no technical merit as a buy or a hold. The 10-day, 20-day, and 30-day moving averages have been in bearish order for more than three months after reaching a high in June. Four times (A, B, C, and D on the chart below) it tested and failed to hold above its 30-day moving average. Any of these times should have been a sell signal. Even on the fourth one, a further 50% loss could have been avoided. Finally this past week it gapped down on unusually high volume (E on the chart).

While it is certainty oversold and has experienced an obvious capitulation gap down, it is too early to call it a buy. I recommend waiting six weeks of basing before considering MOS a buy. As it was downtrending it attempted to base near 105 and again at 75 but each basing period lasted only three weeks before failing. This is in contrast to the six week basing near 120 which preceded the run-up to its 163 high.

One scenario for calling a buy: when (and if) a six-week basing occurs look for a confirming upward breakout. Carefully guard this position with trailing stops and expect resistance around 70 - 75. The last basing attempt occurred at 75 so this is likely a resistance point for a resumed uptrend. It is also noteworthy an enormous amount of open interest for 70 calls (see below) exists making 70-75 a very interesting area.

I like the fertilizer story and MOS is a core holding if you believe in the space. I don't believe in the ethanol story. Instead, the demand for food should keep a floor under MOS and other fertilizer stocks. Buying at these levels makes Rational sense to me.

Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs

by Kim Gerdes |  10/10/08