The unmatched quality of one resource could land you gains of 108% or more…
by Zachary Scheidt
This issue went to print 9/23/10. Prices and margins quoted reflect levels at this date.
Are you on top of the newest “green” investment trend?
There is a new family of green investments that is creating
billionaires out of savvy investors. And you might be surprised
to know that the investments have nothing to do with
alternative energy or waste management.
In fact, this new green investment wave is rooted in some
of the oldest business techniques known to man — and
yet the concept is gaining new traction and resulting in huge
investment gains for those who understand the value and the
dynamics behind this explosive global business.
Today I’m going to tell you about one of the leading green
companies that is gearing up for what I expect to be a 108%
return over the next 12 months. That number is likely to be
too conservative, but I’d rather have us be pleasantly surprised
when demand drives the price of this stock much higher.
But before we get to this pick, let me explain exactly what
is driving the profits for this new green investment…
Hostile Bids and Obstinate Managers
Twenty billion dollars is a lot of money! Making $20
billion in about eight weeks is even more impressive. But
that’s exactly what happened for shareholders of Potash
Corp. (POT:NYSE) this summer. What’s even more
astounding is that the majority of these gains occurred
overnight as the stock gapped 28% higher on Aug. 17.
What caused the sudden move? Rival BHP Billiton
(BHP:NYSE) offered to buy the entire company for
$39 billion. The offer was significantly more than the
existing market value of the stock — but Bill Doyle (CEO
of Potash Corp.) was not amused. The executive’s message to
BHP? “GET LOST!”
Of course, Doyle didn’t phrase it exactly that way. I think
his exact words were “the BHP Billiton offer substantially
undervalues Potash Corp. and fails to reflect both the value of
our premier position in a strategically vital industry and our
unparalleled future growth prospects.” In other words, “Come
back when you have a better offer…”
Investors obviously believe the company will get a
better offer because the stock immediately began to trade
at a significant premium to the offer price.
If you’ve followed as many hostile takeover situations as
I have, you might think that Doyle is just being obstinate.
After all, no manager really relishes the thought of having
another company take over his leadership — regardless of
the price. But this situation is a bit different.
You see, Doyle personally controls the equivalent of 3.4
million shares of Potash Corp. So the price jump on Aug. 17
netted the man more than $100 million in profits. Doyle has
hundreds of millions of reasons to sell POT at an attractive
price. And he claims he is willing to sell the firm — but not
unless he gets a fair price and $39 billion is NOT a fair price
for this resource-rich firm.
The Global Importance of Potash Corp.
Potash Corp. is extremely important because the company
controls a huge amount of the world’s potash nutrients.
Potash is one of the primary fertilizers used globally to enrich soil and increase
crop yields — a huge geopolitical issue for the entire world.
Over the next several decades, the world’s population is slated to increase
by literally billions of people. Most economists are using models that
estimate the global population at 9.1 billion people in 2050. That’s up from
6.8 billion today — and raises some very important concerns.
How are we going to feed this growing population? More than any green energy,
or green waste treatment ventures, the world needs to invest in green FOOD
projects — the kind of projects that will ensure the world’s population has
enough food to eat over the next 40 years of expansion.
Last week I talked with an experienced farmer from Indiana who has
spent the majority of his career living and working in the U.S. grain belt.
This man has seen multiple generations of success as farmers navigate floods,
droughts, demand swings and supply fluctuations.Herschel told me about a few of
the new techniques for planting denser, higher-yielding crops, and the equipment
necessary to both plant and harvest using the new approaches. Regardless
of what we throw at the dirt when it comes to technology and technique, the
advances don’t amount to a hill of beans without good soil…
And good soil is not as plentiful as you might think! The world may
not be running out of arable land, but it is certainly going to have to learn to
make better use of that land if we are to feed this ballooning population.
Fertilizer Resources Offer Solutions OK, I realize that an investment in
“fertilizer stocks” may sound dry and boring, but I promise you won’t be
bored with the profits that are possible in this dynamic market. I can tell you
that global governments aren’t at all bored with the investment picture…
Just in the past month we have seen a good bit of controversy stirring
between the emerging markets that desperately NEED access to fertilizer
resources and the developed nations that currently CONTROL the majority of
potash and phosphate deposits.We’re seeing competition start to
heat up when it comes to the Potash Corp. reserves. If China were to walk
up to Doyle and make an attractive bid for Potash Corp., Doyle might actually
accept. But the deal would NEVER get done because Canada would block it.
There’s no way Canada would allow China to step in and control such a
large portion of one of the world’s most valuable resources.So what does China do? According
to a recent article in The Wall Street Journal, China is shopping around for a “politically correct” partner to help it buy Potash Corp.Temasek Holdings (a major Singapore investment company) was recently
approached by a Chinese sovereign wealth fund to “participate” in a group
that is putting together a better bid for Potash Corp. And before the Temasek
report, there was another mystery announcement that a Canadian pension
fund was approached by a “Chinese-led consortium” that was seeking a Canadian
partner to join the group. Sounds like political posturing to me.
So with all the secrecy, it’s pretty clear what is going on. China is pulling
out all the stops to get its hands on fertilizer resources — and the country
is not likely to take “no” for an answer. The bottom line is that the world
NEEDS fertilizer. Stocks in the sector are already on the move.
I’ll tell you right now that it’s probably too late to make a lot of money in Potash Corp.
That train has already left the station. But I have an even MORE attractive
fertilizer opportunity that appears to have its best gains still in front of it… n
The world may not be running out of arable land, but it is certainly going
to have to learn to make better use of that land if we are to feed this
ballooning population. 3 over please…
It may be hard to believe, but a company that supplies farmers with fertilizer
could be the most profitable investment you make in 2010… The world’s most
influential investors are falling all over each other to get access to important
agricultural products like Potash and I’m not just talking about guys like
Warren Buffett or John Paulson. The true influential investors are not even the pension funds and
endowments with their billion-dollar portfolios and their natural bent toward commodities and hard assets (these kind of investments protect their capital from inflation — one of the chief mandates for pension funds
No, the investors I am talking about are the Sovereign Wealth Funds —
especially the ones backed by the Chinese government. These funds aren’t necessarily in place just to
“make money.” The purpose of these investment funds falls more along
the lines of protecting the country’s wealth and well-being. And in this
case, buying the RESOURCES the company needs is much more
important than just making a profitable investment.So the demand for potash and
other fertilizer products is less affected by price and more affected by the
need of emerging markets — which puts us in an attractive spot if we act
quickly. The company I am about to introduce to you currently owns an
unbelievable fertilizer deposit — the magnitude is so big that management
has estimated 100 years of future production before the reserves are
tapped out. Not only is the magnitude of resources tremendous, but the quality
of the fertilizer is also unmatched. This company has developed an exclusive fertilizer product (K-Mag)
that supplies not only the typical fertilizer components such as nitrogen,
but also adds in sulfur and magnesium, which leads to healthier crops and more
profitable farming techniques. The firm is sitting in a very competitive
position with unmatched resources and a management team that knows
how to turn those resources into a genuine profit for investors.Introducing Mosaic
The Mosaic Company (MOS:NYSE)is the world’s largest supplier of phosphate
and fertilizer products. The company is located in small-town Plymouth, Minn.,
but is a true global leader serving customers in more than 40 countries
around the world. The company’s potash mines produce roughly 10.4 million tons each
year — the majority of which come from mines in Saskatchewan, New Mexico
and Michigan. Although the majority of fertilizer is produced in North America,
more than half of the production is shipped to other regions of the world.
Much more than just a fertilizer producer, Mosaic has become “vertically
integrated” — which simply means that the company has become involved
in the storage, distribution and application business in places like
Brazil, Argentina, Chile, Mexico, India, Thailand and China.
Controlling functions like storage and distribution is incredibly important
to a global leader like Mosaic. This function serves two major purposes.
First, management receives vital firsthand information about the market
demand so it can adjust production levels to better match the need out in
the field. Second, MOS doesn’t have to play the politics game with distributors
or the owners of storage facilities. Reducing the competition when it
comes to HOW its fertilizer products are stored and distributed gives Mosaic
a significant edge.Mosaic’s management team is committed to organic growth by
increasing production in the mines that the company owns. But at the same
time, the team has proven its business savvy by acquiring competing companies
CapTure 108% as The world CompeTes To Buy FerTilizer from time to time when the situation is
right. Having a few different options when it comes to the growth of the
business is exactly what I like to see from our New Growth candidates.On top of the excellent business
growth, I’m also very impressed with the company’s fiscal discipline. It has taken
a lot of money to open and develop the company’s mines — and in the process,
Mosaic racked up a significant amount of debt. But the company has been
working hard to reduce its liabilities — paying off nearly $1 billion in debt
during fiscal 2009. If the company could repeat this performance in
2010, the end result would be for the company to be virtually debt free…
I’m not expecting MOS to be quite as aggressive paying off the debt this
year, however. At this point, investors would be better served if Mosaic used
the capital to invest in its own mining operations — or possibly making
an acquisition to pick up even MORE resources for future development. You
can see in the graph above that Mosaic is using a significant amount of its cash
to spend on expanding its operations to meet demand.
The debt repayment in fiscal 2009 was still a great move. The reduction in longterm interest expense gives us more profit to work with and the stronger balance sheet puts MOS in a great position when
negotiating to make future acquisitions.Essentially, there are three issues that make The Mosaic Company an exciting New Growth Investment:
1) Tremendous Resources —
The company is the No. 1 phosphate producer and the No. 2 potash producer. On top of the valuable
underground fertilizer resources, the company’s distribution and storage facilities also carry impressive value.
Management has stated that the company’s 16 existing mines have enough resources to support 100
years of future production. That’s a heck of a lot of fertilizer and as scarcity and global demand pick
up, the companies with access to these resources are going to be the ones that become prime investor
targets, pushing share prices significantly higher.
2) Robust Earnings — Mosaic is generating strong earnings for its shareholders and even during the bear market in fertilizer prices last year, the company still managed to
churn out roughly $2 per share inearnings. In fiscal 2009 (ending May 31, 2009) the company actually
generated $4.06 in earnings — a level the company is likely to exceed in the next 12 months.
Rising global prices for potash and phosphates is likely to be a consistent tailwind for profits, and
increases in production makes the situation all the more attractive. Imagine producing more of something
each year — while your customers pay higher prices for every unit you produce! That’s exactly the
environment that Mosaic is dealing with today.
3) Takeover Potential — Even though Mosaic is a relatively large company, it’s not so big as to avoid
being acquired by a major miner or even a major investment firm. Potash Corp. is nearly twice the size of
MOS and they are certainly in play as I write…A buyout offer might give us a smaller gain than the 108% I am expecting, but if it were to happen in the next few months we would see an immediate jump in the share
price — likely something in the magnitude of 30% to 50%. While I’d rather stick around for a tripledigit gain, a 50% gain in a matter of a few months would give us the capital to roll into another resource
play that still has a long way to run.The Target.To figure out where MOS will trade in the next 12 months, I have been considering several factors. First, the company has a much healthier balance
sheet that gives long-term investors more confidence. Secondly, the earnings projections are quickly being adjusted higher — with more likely to come. This also breeds confidence, which leads to a better price multiple. Finally, China has shown its cards and it is clear they are buying any resources they can get their hands on — this leads to much more speculation in the industry with long-term investors, short-term traders, and arbitrage desks all converging to push stocks in this sector higher.At this point, analysts are expecting
Mosaic to generate about $4 per share in profits for fiscal 2012 (ending in May 2012). I can almost guarantee that the analysts are sandbagging because I know how the system works. So with that said, I think it’s very
likely that MOS earnings will come in 25% above current expectations — and even THAT is playing it safe.
Remember, China is driving up fertilizer prices and MOS is able to produce significant resources to take advantage of these great prices.It’s tough to gauge investor sentiment a year from now, but I certainly believe
that the fertilizer issue will be a main topic of conversation. As investors become more confident in the longterm trends in population growth, food demand and farming techniques, they will be willing to pay more to participate in the investment theme.I expect investors to pay at least 25 times earnings for fertilizer stocks in the near future — especially companies like MOS, which have resources to cover the next 100 years of production. Based on our conservative earnings estimates of $5 per share, that gives me a price
target of $125 per share — up 108% from the current price near $60.At this point we’ve been talking primarily about China as a driver of demand. But India has a significant population issue too. If the Indian government begins competing for these resources, fertilizer prices could become all the more inflated,
driving our investment higher.Another issue at stake is the U.S. dollar. We’ve talked all year about
how important it is to own “stuff” or companies that produce resources instead of just dollars. A devaluation
of the dollar would mean that Mosaic’s resources are all the more attractive — because they are valuable regardless of the level of paper currency.So I’m confident that Mosaic will be a healthy part of our New Growth Investor portfolio — generating gains even while the rest of the market continues to struggle. n
ACTION TO TAkE:
Buy The Mosaic Company
(MOS:NYSE) up to a price of $68.After an eventful summer, it’s important for us to take inventory of our
positions and do a little housecleaning heading into the fall. I’m happy with the way most of our positions have panned out, but with clouds on the economic horizon and plenty of gains in our pockets, I’m much more prone to taking some risk off the table.Solar Energy Still a Bright SpotUp to this point our solar positions
have all traded positively — almost all since the first day we bought them! I’m still bullish on the opportunities in the sector, but let’s look at each of our positions individually.Yingli Green Energy (YGE:NYSE) is currently up about 110% from our original purchase price. We took profits on half the position with 238% gains
in January and since then the stock has backed off quite a bit. Still, YGE is trading for just 10 times 2011 expected earnings and analysts have been revising their expectations higher. I want to hang
on to this industry leader, as we should still have a shot at much larger profits.Canadian Solar (CSIQ:NASDAQ) looked like an excellent idea when I was covering the stock early in the summer.
However, as luck would have it, the SEC announced an investigation into
accounting practices just before our issue hit your inbox. That meant we were able to pick up shares at a significantly reduced price, but the investigation also opens up more risk.Let’s go ahead and book our 35% to
40% profits (over just four months) and leave the guesswork up to other investors… Action to take: Sell Canadian Solar (CSIQ:NASDAQ) at the market to close out our gains.Trina Solar (TSL:NYSE) on the
other hand is just fine. Of course the stock is going to have plenty of back and forth movement over the next
few months, but like YGE, the stock is relatively inexpensive and the environment still looks very good
for solar manufacturers.
Gold Miners Continue
Higher Our two gold miner positions US Gold Corp (UXG:AMEX) and Allied
Nevada Gold Corp. (ANV:AMEX) are both performing very well as investors
“flock to the safety” of gold. Gold prices have hit a new record high, and with both
of these companies sitting on significant underground reserves, the asset value of
each firm continues to appreciate.I’m continuing to look for additional opportunities in this area and you probably already received my special report with three gold mining stocks to consider. UXG is our biggest winner right now with a 320% profit, and even though ANV is our newest position (with only
a month under its belt) we already have a double-digit percentage gain.No changes to our gold positions at
this time.Finance Positions Remain Under Pressure.We have four positions that could be classified as “finance” holdings —
none of which fit into the traditional “banking and investment” categories —
but names that are somewhat affected by industry developments in the financial sector.
CME Group (CME:NASDAQ)and IntercontinentalExchange (ICE:NYSE) both stood to gain a lot
from the financial reform bill. But the performance of both has been disappointing as banks are reducing the
amount of risk they take with derivatives and “proprietary trading desks” are either being shut down or handcuffed.I’m really disappointed to see that our thesis is not working out as expected,
but if CME and ICE cannot rally in this environment (when the government is mandating that financial institutions clear their trades through these firms) there is obviously risk of losses if the regulations aren’t as strict as we expect.So let’s take a roughly 10% loss on CME and a 10% gain on ICE and call it a wash. There are better opportunities for us to pursue in situations that have stronger growth characteristics.
Action to take: Sell CME Group (CME:NASDAQ) and IntercontinentalExchange (ICE:NYSE) to reduce risk.
(AGO:NYSE) and Chimera Investment Corp.
(CIM:NYSE) are both profitable (especially
considering the huge dividend on CIM).
Special Situations — A Mixed Bag.I classify our remaining positions as “special
situations” and for the most part these have been very healthy investments. Syniverse Holdings (SVR:NYSE) is up roughly 65% since we purchased it in May of 2009. That’s well over two and a half times the return on the S&P 500 during the same period. A couple of months ago we booked half profits on the
position while still hoping for a triple-digit gain on the second half.Technology has been a strong sector but I
suspect that if we head into a double-dip recession, this industry could have more than its share of
trouble. So today I want to go ahead and book our 65% profits on the second half and conserve
our capital for better opportunities in resourcebased investments. Action to take: Sell Syniverse Holdings (SVR:NYSE) at the market for 65% profits.Next up is TransDigm Group Inc. (TDG:NYSE), which continues to make new highs. The stock is still reasonably priced, the industry is growing, the management team is making smart decisions, and I want to continue to own the stock.Aircastle Ltd. (AYR:NYSE) on the other hand has been a bit of a disappointment. I overestimated the company’s opportunity — plain and simple.We’ve got better things to do with our capital. It’s time to take our losses here and move the
money to better opportunities that are showing more strength. Action to take: Sell Aircastle
Ltd. (AYR:NYSE) at the market to cut risk.Penn Virginia Resource Partners (PVR:NYSE) has been a delight to hold. We are getting paid a yield of just under 8% while at the same time the stock price has gone up by 12%. Not a bad return for such a stable growth investment. Investors continue to flock
to MLP stocks like PVR because of the yield and stability. I expect that we can hold on for
another quarter or two and see much larger gains while still getting paid a yield.
Last but not least is our emerging markets position MercadoLibre Inc. (MELI:NASDAQ).
I’m still convinced that the “eBay of Argentina” can continue to generate returns for us, but I
would rather take a bit of risk off the table. Let’s sell half of our position to set aside some
additional cash for other aggressive growth positions. Action to take: Sell half of
MercadoLibre Inc. (MELI:NASDAQ) at the market to lock in 50% returns.
With all of the cash we are raising with these transactions, you should have a good
war chest for bargain hunting. That’s a good thing because I expect that this fall and winter
we will want to have some cash on hand to pick up New Growth opportunities at
significant discounts.To your investment success,
Editor, New Growth Investor