Canadian Fertilizer Play Smells Good

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

… focuses on the boom in soft commodities that I discussed in last week’s Global Guru. Thanks to a combination of government-mandated ethanol production and an expanding global middle class with an ever larger appetite, I expect that the second half of the commodities boom will be dominated by soft commodities like corn, wheat and soybeans. This week’s pick, Potash Corp. of Saskatchewan, Inc. (POT), is my #1 way to profit from this big-picture shift.

Canadian-based Potash is the world’s largest fertilizer company in terms of capacity. Its three main products are potash, nitrogen and phosphate which are used in the agriculture, animal nutrition and industrial markets. And here’s why I expect Potash to generate double-digit percentage profits into the summer months of 2007.

First, U.S. farmers are ramping up corn production to meet growing demand for ethanol. Without enough fertilizer to help corn crops grow, farmers will be unable to meet that demand. So far, rising demand for ethanol has led to a 15% jump in planned U.S. corn plantings, which have hit their highest levels in 60 years. But with farmers planting on half the land they did in the 1950s, demand for fertilizers has exploded as farmers need to be ever more productive.

Second, ethanol-induced corn planting is only part of the story. Demand for soft commodities such as wheat and rice will continue to grow as the world’s population swells by 40% to 9.2 billion by 2050. Record prices for major crops like corn and wheat mean high-earnings potential and lower downside risks for Potash. Potash’s senior management is convinced that we are at the beginning of a period of significant consumption growth and strong prices for all its products. No wonder that Potash’s main facility is undergoing a $775-million expansion project that will more than double its production from 800,000 tons of potash in 2006 to 2 million tons by 2010.

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Potash has been harvesting bigger than expected profits from all of its businesses. In first quarter 2007, sales jumped by 34% to $1.15 billion and earnings leapt 56% to $1.85 a share. That earnings per share number handily beat expectations of $1.71. Looking ahead, annual earnings are projected to grow at 46% and Potash raised its full-year outlook by $1.25 a share to $7.50-$8.50 a share. With Potash recording five consecutive quarters of earnings growth and a return on equity of 25%, the company is firing on all cylinders.

So buy Potash (POT) at market today and place your stop at $172. Note that Potash’s board of directors just approved a 3-for-1 stock split that takes effect tomorrow, May 22. This should improve liquidity and make shares more attractive and accessible to new investors. The board also doubled the company’s quarterly cash dividend to 30 cents per share on a pre-split basis. Our short-term target price for Potash is a (pre-split) $225.

PORTFOLIO UPDATE

To make room for Potash (POT), let’s move German insurance play Allianz (AZ) out of the Global Bull Market Alert portfolio. Having gained 7.66% since our initial recommendation — an annualized gain of just under 46.2% — Allianz is still a solid play on the overall recovery of the German stock market.

Hold on to last week’s short-term trade in China Aluminum (ACH) for now. We’ll be looking for a bounce in that stock over the next week or so.

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Greetings from Las Vegas! I am enjoying meeting a lot of you at the Money Show. It's always a terrific pleasure to discuss some of my ideas with you face-to-face. America Movil (AMX) is now up almost 15% since our initial recommendation. With its Price Earnings to Growth (PEG) ratio of .53 (anything below "1" is a screaming BUY), it is no wonder that the stock remains the favorite of some of the biggest hedge funds in the world.

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