Headquartered in Santiago, Chile, this South American giant engages in the production and distribution of potassium nitrate, iodine, and lithium carbonate worldwide in more than 100 countries. Like your existing holding in Potash (POT), SQM has benefitted tremendously from the worldwide agricultural boom as demand has increased for the fertilizer products. And also like Potash, SQM saw its stock price soar in the first quarter, and then retreat 15% from its high, before resuming its upward trajectory.
Here’s why I think SQM is set to continue its strong gains in the coming weeks, and why a sharp sell off in the stock last Friday offers a solid point of entry for investors.
First, consider the benefits of investing in Chile, long a vanguard of free market economic reform in Latin America. Thanks to a combination of privatization and free trade, Chile has the highest per capita GDP in Latin America. Boosted by the boom in global commodities, the Chilean economy grew 5.1% in 2007. The global economic slowdown notwithstanding, recent economic data in Chile revealed stronger-than-expected industrial output and only mild inflation. As a result, Chile’s currency is soaring, up by double digits against the U.S. dollar since the beginning of the year. Chile’s stock market is also one of the strongest in the world this year.
Second, with prices in metals, energy products and agricultural commodities climbing to near record highs, times are good for SQM. First quarter earnings jumped 56% to 25 cents a share. Revenues for the period totaled $326.3 million, representing growth of 37.6% compared with the $237.1 million reported in 2007. Earnings grew 26% year over year between 2006 and 2007. And with fertilizer prices soaring through the roof, the future looks even brighter.
Finally, SQM also recently has established a toehold in China. The company announced that it has entered into an agreement with China’s Migao Corporation to create a joint venture for the production and distribution of potassium nitrate in China. The first step of this agreement will be the construction of a new, 40,000 metric ton potassium nitrate facility, which will require a total investment of $20 million. The plant should be up and running by 1Q 2009. Although it is already present in more than 100 countries, China is set to become one of SQM’s most important markets.
So buy Sociedad Quimica y Minera de Chile S.A. (SQM) at market today and place your stop at $24.00. There are no options on this one.
A word of warning: SQM is a volatile stock, similar to your holding in Russia’s Mechel (MTL). That means potential for big returns, but at the cost of often stomach-churning volatility. If Mechel’s gyrations have made you queasy, take a relatively small position in SQM initially. You can always add to it later.
To make room for SQM, and with agricultural futures prices now firmly in a short-term downtrend, sell your shares of iPath DJ AIG Agriculture TR Sub-Idx ETN (JJA) at a loss.
PORTFOLIO UPDATE
Canadian fertilizer giant Potash (POT) found its feet this week, and after its recent consolidation, the stock is set to resume its uptrend. You’ve already sold the last of your initial options to lock in 112% gains. But if you’re looking for another shot at triple-digit percentage gains, I recommend you buy the December $210 calls (PJNLB.X).
Mechel (MTL) endured an astonishing roller coaster ride this week, dropping 5% at one point, but rallied to hit a new record high on Friday, ending the week up almost 15%. You already took profits of 60% on the options two weeks ago. But hold on to your remaining options for now, as this one has more upside left.
NII Holdings (NIHD) also had a strong week, up more than 7%. With your remaining options now up 82.11%, hold on to both the stock and the options for now.
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