I have noticed a few things over the years... first, analysts who are often wrong are always conservative. They protect their hide. They rarely make calls ahead of the curve. And rarely do they make calls the week of earnings. Yesterday we had a downgrade of Mosaic by Citibank a few days before earnings. Very curious and does not fit the pattern of ultra conservative analysts.
- Shares of fertilizer company Mosaic Co. fell Tuesday after a Citi Investment Research analyst said there's a chance that fiscal third-quarter profit may miss Wall Street expectations.
- Citi's Brian Yu, who expects earnings of 83 cents for the quarter, says there's a chance Mosaic's results will miss the average estimate of analysts polled by Thomson Financial. Analysts currently expect 95 cents in earnings for the quarter.
- Yu says phosphate profit will likely decline from the year-ago quarter, on seasonally lower shipments and higher ammonia and sulfur input costs.
But let me also be clear that as each quarter passes more and more people who know little about fertilizer pile into the space because it's hot and sexy. So the risk increases massively. Especially around earnings season; akin to solar in the latter part of 2007. So purely as a risk AVERSION I am going to cut back my exposure in Potash and Mosaic going into this Friday's earnings. Not because of anything to do with the fundamentals or "natural gas input pressure". But because I believe the probability exists that many people who piled into these stocks the past 3 months have a propensity to panic over any whiff of PERCEIVED (not real) bad news. So we might get a buying opportunity. This actually happened last quarter when the "selloff due to natural gas costs" lasted all of a few hours.
Further, I am breaking multiple rules by loading up on this stock (Mosaic) ahead of earnings
#1 I hate earnings because people overreact, so I try to limit risk (giving up potential upside) by lowering exposure on almost any stock going into earnings
#2 The ag stocks are not acting well of late - have to respect that
#3 Mosaic is trading below 50 day moving average (could change by Friday)
#4 the above mentioned "analyst rule"
Again, aside from the stock you need to know the herd you trade with. I know the herd that has now moved into fertilizer stocks. They shoot and ask questions later. This is the same herd that decimated solar stocks to the tune of 60%+ losses in the past few months and the same herd which shot Apple (AAPL) to the tune of 40% after stellar earnings because the guidance was "not enough" despite always conservative guidance that they smash regularly. The same herd which killed Crocs; the same herd which killed Google (GOOG), the same herd... well you get the idea...
So I am going to spend the next day reducing exposure (I just began the past 15 minutes) and I'll let the smoke clear... I might miss a big move up but I need to put personal beliefs about the long term fundamentals aside and protect capital. I took a big hit in Apple, in a stock that was unfairly beaten down. But there is no fair in the stock market - just emotional reactions and lots of momentum traders who could care less about fundamentals. Again it's not the news, it's the reaction to the news - good news is already baked into this sector - see Monsanto today... fantastic results, but a sell off.
So for a temporary respite going into Mosaic's Friday earnings I am changing course and will reduce exposure. I expect tremendous numbers Friday and later in the month with Potash (POT). But I could also make a very easy case that someone will find something to complain about and say "the story is ending", and cause a sell off. So its a bipolar outcome - it could go either way. And that is gambling, not investing. Unfortunately this is the market we are in, in this era - where the long run means "next week", and shooting first and asking questions later in is the norm. Earnings season is a minefield. So I don't want to give up weeks of good returns by an overreaction by the "herd".
Just want to make that clear since I have been, am, and will continue to be one of the biggest proponent of (especially potash based) fertilizer stocks, and the agriculture trade in general. This is a very short term move to simply reduce risk to (potential) shareholders. It does not mean the stocks cannot gap up and run 25% after an incredible earnings report. But it is not worth the risk to me to give back a lot of return by being overweight going into earnings. I'd miss some return but losses are harder to make up than "lost opportunities". We'll re-assess after we see the reaction to the news Friday. But I will be back, in scale, soon enough - even if it at higher prices post earnings. A temporary respite - until then I play with such lovelies as homebuilders ;) [Apr 1: A Kool Aid Trade - Adding Homebuilder Exposure with Lennar]
Long Mosaic, Potash, Lennar, Apple, Google in fund; long Mosaic in personal account
5 comments:
Mark: you dont need to get scared off the ferts by the yelpings of one analyst who happens to have been WRONG on MOS and POT the entire way up.
Stick to your long term guns. If I had any more cash I'd have been buying even more MOS on the dip, and POT cotninues to look exceptionally strong.
In the words of Maggie Thatcher, "Dont go all wobbly on us now" on the long term fert-ag-food plays !!
Mark
Agree with Jeff. Understand your point of view, and can certainly see the short term risk. I've owned both plus Mosanto for 3 years, and evaluate the
'business" fundamentals often. My research says they are all good through 2010. Maybe beyond. I hope they do dip as I am holding cash from other profits and would like to add here.
I'm with Mark, in that investing and trading is not an all-or-nothing game. layer in and out, when the risks change. I have enough of the canpotex cartel, so I dont have a problem taking 1/3 of the position off the table. I believe that's Marks overall strategy aswell. So the concern isnt the long term thesis. It's simply a bit of risk management, should the stocks get some a day or two of woodshed action.
Hi guys, I felt the same way going into Apple earnings last quarter - they did nothing but execute but the stock was trashed. I am not saying it will happen; I am just saying the probability is there.
I'd rather buy 10% higher Friday or next Monday if necessary and avoid the systematic risk. Again, this is a safety move that has nothing to do with the fundamentals - I am protecting myself against the speculative type of investors who now seem to be piling into these names. I had planned to do this in the future in fertilizer (cut right ahead of earnings and rebuy after any fallout) but moved up the timeline simply due to the stock action.
The Citibank analyst really is a minor point - his 2nd point is in fact totally useless (the comment about the crop report in the US - very ethno centric view which seems to miss the point fertilizer is a world market). I don't even think nat gas is an issue - the costs will go up, and they will get passed on... but I can see people panicking about it - they did last quarter and briefly pushed the stocks down 8-10%.
Again its not a defense against the companies/stock; its a defense against the type of people who pile into the stocks. I lost a lot of money very quickly in Apple going against my rules, so I am going to stick to it - even if it costs upside.
RMJ, I am taking far more off than 1/3rd :)
Half the battle in making money is not losing it. That's the lesson of 2001-2003. I am actually a very cautious investor even though I trade a lot - trading is more of a defense mechanism to me. I leave a lot on the table in true bull markets in fact since I'm always looking over my shoulder.
I'll be happy to buy back either higher or lower; the long term story is just that good. But I wouldn't mind if a lot of people who just entered the game got washed out and exited fertilizer permanently - much like the solar sector did to wipe out a lot of hot money who didn't know much about the sector - just chasing hot returns.
Capital is precious. When you lose 15-25% on a position it takes a lot of work to make that back. All you do when you miss on upside is simply miss out on profits - a far less problematic situation.
Just my opinions from years of losing money on earnings announcements ;) In my personal account I almost NEVER in any stock in earnings. Just too much unmanageable risk. I look at Carmax today - terrible news, terrible results, and the stock is up 6% ;) Only washed out stocks seem to be good probabilities to buy ahead of earnings. lol. Such a perverse market!
Post a Comment