Wednesday, December 14, 2011

Bearish on POT

Potash Corp./Saskatchewan (USA), whose ticker symbol is a slightly misleading POT, makes a good part of the stuff that nurtures the soils in which our food is grown.

It is the world's largest potash company, the third largest phosphate producer and the second largest nitrogen producer. If the product is something that fertilizes the crops, it's a fairly safe bet that POT has a hand in it.

Once favored by trend traders for its reliable tendency to rise,  from under $3 to more than $80, POT fell like rock along with everything else during the collapse of global finance in 2007/2008.

Once recovery began in 2009, POT proved to me more a run-of-the-mill big-cap play. No longer reliable, it largely moved in time to the ebbs and flows of the broader market. It rose, back into the $60s, but with significant stumbles along the way.

Prices generally are ebbing now, and so is POT, from a peak of nearly $64 in February down to the present $39.20.

What makes the chart interesting is that this week it moved to a lower low, suggesting that there is more downside to go.

A decline below $38.71 would continue the pattern of lower lows. A rise above $41 would break that pattern for the very near term, and above $44.50 would mark a more significant near-term reversal.

For the very long term, POT remains in the uptrend that began December 2008. The current mid-term downtrend started last February, and the near-term (hourly chart) decline kicked in on Oct. 27.

POT is a money-maker, with a return on equity of 40%. The debt-to-equity ration of 0.50 is on the high side, but not enough to send me fleeing in horror. Institutional ownership stands at 69%, provided a large degree of stability as these giant vessels of the investing world slowly turn their strategies to new headings.

Price to sales is 3.99 -- a 299% premium. This stock is grossly overpriced in terms of current sales, which is great for bear plays, such as the one I am contemplating.

I am profoundly ambivalent about good financials on stocks that I'm shorting.

On the one hand, if the financials are good, then the expectation is that the stock's natural inclination is to rise. On the other hand, a stock with great financials is quite unlikely to disappear into the maws of bankruptcy and failure.

Whichever seems most important, the fact is that POT's chart is stand-out bearish, buttressed by a nice volume spike on the most recent sharp decline that began Dec. 8.

Disclosure: I opened a bear position in POT today.

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