Tuesday, May 25, 2010

Potash and Agrium could be the stocks of this decade

Today, UBS Securities Canada cut its target price on fertilizer companies Potash Corp (POT) and Agrium (AGU) from $116 to $113 and from $83 to $80, respectively. It cited price increases “have been slow to materialize.” Both Potash Corp and Agrium produce and market potash, phosphate and nitrogen fertilizers.

With the emergence of the BRIC countries (Brazil, Russia, India and China) the demand for food is skyrocketing, as millions of formerly impoverished people move into the middle class. Investors are constantly looking for the next big play. Oil was the play of the decade from 2001 to 2010. While some believe renewable energy to be the next big thing, I believe it is still too early to earn big profits from investing in companies involved with renewable energy, since solar panels and windmills are not widely used. Instead, agriculture/fertilizer companies are facing an imminent boom in the demand and price of their products, simply because of demand from the BRIC nations.

With Potash's closing price today of C$102.46, and Agrium's closing price of C$57.38, they represent tremendous upside considering UBS's target price of C$113 and C$80, respectively. In fact, UBS's target price represents a return of 28.3% for Agrium. Furthermore, UBS is not the most bullish on the two stocks. For Potash, the consensus target price of 23 analysts is US$125.36 (return of 23.8%); meanwhile, my target price is C$130, which is a level most recently reached in December.

Basically, the debt crisis in Europe has caused these two stocks to be as low as they are today, which is similar to many other stocks on the TSX. Once the worries about Europe fade, demand for fertilizers will take these two stocks significantly higher in the next 12 months.

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