Skip to main content

7 day losing streak for the Dow but not every stock is plunging - value stock in the Ag sector is breaking out

After running Saturday morning's Alert HQ process I checked my "Reasonable Value" screen against the day's Trend Busters and Trend Leaders. For those of you who have not see one of my previous "Reasonable Value" posts, here are the criteria for the screen:
  • PE between 0 and 20
  • PEG between 0 and 1.3
  • Price-to-Sales less than 2
  • Debt-to-Equity less than 1
Today there is just one stock that passes this screen and it's from the Trend Busters list. The company is CF Industries Holdings (CF). The following chart shows why the stock is a Trend Buster:

On Friday, the stock popped up above the bearish trend line (in green). It now sits just below its 50-day moving average. From a technical analysis point of view, the bullish breakout over the downward trend line is a positive but buyers would need to have confirmation by seeing.the stock move above that 50-DMA. Supporting the bullish case, MACD and Williams %R show a change in trend to the upside is in the making. This is further supported by Slow Stochastics (not shown above).

Background and Financials --

OK, now we know why CF is a Trend Buster. Let's look at why the company passes the "reasonable value" screen.

First of all, CF Industries is basically a producer of fertilizer, primarily nitrogen and phosphates. The company has a market cap of $4.6 billion, a trailing PE of 11 and a forward PE of less than 9. PEG is a mere 0.57 and the Enterprise Value / EBITDA ratio is less than 5. The Price-to-Sales ratio is 1.9 and Debt-to-Equity is nearly zero. All these measures suggest deep value.

I mentioned above that the company has a market cap of $4.6 billion. You might be interested to know that they are holding over $1 billion in cash. In addition, they pay an annual dividend of $0.60.

There's more good news from the point of view of fundamental analysis. Take a look at some of the measures calculated by my Trade-Radar software:
  • Annualized cash flow yield which, at 1.52%, is a little low but still positive
  • Cash flow to debt coverage is excellent
  • Survivability (debt less than 3 times EBITDA) is also excellent given that EBITDA is $731 million and debt is less than $5 million
  • Dividend is sustainable based on it being less than 60% of Diluted EPS which in the last 12 months was over $6
  • Management effectiveness is good based on the fact that Return-on-Equity and Return-on-Assets are both in the teens, 19% and 15% respectively.
  • Price-to-book is less than 2
All this points to a company that is financially quite sound and qualifies to be considered as a value stock. So why did the stock take such a hit before its recent upturn? The following chart from Google Finance has the answer:

The company has struggled during the economic downturn as demand and prices declined. Revenue, earnings and margins are all down. You may remember some of the high flying potash producer stocks from 2006 and 2007 that have since crashed. CF is not a potash producer, focusing as I mentioned above on nitrogen and phosphates, but its stock price followed the same trajectory. Driven by the big move into ethanol, planting of corn skyrocketed and the need for fertilizer followed. The growth in the market for ethanol has since slowed.

The outlook --

Back in June, the Department of Agriculture provided a bullish report on corn and soybeans. This is a positive for the fertilizer stocks because corn requires more kinds of fertilizer than many other crops. CF and others popped on the news.

Here are a few other items that suggest the recovery is real for CF.

Management's outlook during the first quarter conference call was bullish. They pointed to low costs for natural gas that conferred advantages for their nitrogen business and added they were exporting nitrogen-based fertilizers to Australia, Mexico and Chile. This is notable as their primary market is in the U.S. The negative aspect of first quarter results was the result of downward pressure on prices in both segments of the company's business.

Looking ahead, management points to reasonable prices for natural gas, increased corn planting, beneficial planting conditions and better expectations for the nitrogen business due to a pick-up in ammonia sales in April and even price increases in the ammonia business. The effects of ethanol are still being felt in the industry.Though the ramp up is not as extreme as in 2006 and 2007, ethanol production continues to slowly increase. This results in more corn planting and growing demand for fertilizer. Corn prices also seem to be in a range that are optimal for the fertilizer companies, encouraging farmers to plant corn and supporting fertilizer company margins.

CF Industries recently acquired Terra Nitrogen Company and the acquisition seems to be proceeding well with nitrogen sales in the first quarter coming in above expectations. Indeed, Terra reported improved net income despite falling prices. The combination of the two companies is also expected to yield efficiencies that will result in cost reductions.

Broadpoint AmTech reiterated a Buy rating on CF Industries on June 15, noting that "patient investors should take advantage of the pullback in fertilizer stocks." Nice call as the stock price more or less began its recovery around that time. Among others, hedge fund Passport Capital also maintains a position in CF.

If things play out as well as management projects, CF's stock price should continue the breakout that we see happening this week. Considering that the stock is well within the value range, any downside should be limited. If you are a value investor, CF appears to be an excellent candidate. If you subscribe to technical analysis, CF appears to show great potential in this case, as well. This is one stock that deserves a place on your watch list.


Popular posts from this blog

Running TradeRadar on Windows 7 and Windows 8

Development of the original TradeRadar Stock Inspector software was begun back in the days before Windows 7 and Windows 8 were available.

As these newer versions of Windows have become more popular, we have heard from some users that they are having problems installing and running TradeRadar on their newer PCs.

The good news is that TradeRadar will work just fine on Windows 7 and Windows 8. All you have to do is adjust the Windows Compatibility Settings to ensure TradeRadar runs as intended.

It is recommended that you can apply Compatibility Settings when running the initial installation; however, it is also possible to apply Compatibility Settings after the program has been installed.

Prior to installation
After downloading the install program, go to the folder where you have stored the TradeRadarStkInsp_7_Setup.exe or TradeRadarStkInsp_7_PRO_Setup.exe executable. Right-click on the executable file and select Properties. Click the Compatibility tab. Adjust the Compatibility mode to …

Alert HQ has moved!

End of an era!

This site was started way back in 2006/2007 to showcase my blog posts and the Alert HQ buy signals and sell signals. Alert HQ grew to include other kinds of stock alerts including Swing Signals, Trend Busters, Trend Leaders, Cash Flow Kings and more.

In the meantime, I built a sister site, and I started using some of the same Alert HQ content over there. As a result, I am discontinuing the Alert HQ data here at

The good news, however, is that all the Alert HQ signals and stock screens are still completely free. In addition, the pages have been enhanced so that you can hover over a stock symbol and a small chart will pop up so you can get a quick look at the stock's recent price action. If you click on a symbol it will take you to a page with plenty of financial and technical analysis information (still free!) as well as a larger chart that you can play with in terms of adding or deleting indicators, moving averages, etc.

Click …

Durable Goods report for Sept just so-so but Computer segment is on fire

The Durable Goods advanced report for September 2011 was released on Wednesday.

I like to dig into the Durable Goods report because it can be useful for seeing how tech in aggregate is performing and how the sector may perform in the future. I always focus on two particular measures: shipments and new orders. Let's see how it played out last month.

Shipments -- 

I generally give less importance to Shipments since this is a backward looking measure reflecting orders that have been confirmed, manufactured and shipped. It's similar to earnings reports -- it's good to know but the data is in the past and we're more interested in the future. The following chart shows how September shipments looked for the overall tech sector:

Results for the overall tech sector were a bit weak but take a look at the next chart which tracks the Computers and related products segment:

Results here were actually quite good and, to make things even better, the previous month was revised upward.