John Burbank Long CF Industries: Invest For Kids Chicago Presentation

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is John Burbank of Passport Capital.  He pitched a long of CF Industries (CF).


John Burbank's Invest For Kids Chicago Presentation

•    Pitching CF Industries (CF).
•    Biggest position for two years.
•    One of the few commodity equities he wanted to be long.
•    Remains bearish on commodities.
•    Located for 30 minutes from Chicago for just for another quarter, did a merger.
•    Stock traded down 30% off the deals.
•    First was a purchase of OCI. 60% of nitrogen fertilizer capacity in USA/5% global market share.
•    USA is the Saudi Arabia of Natural Gas.
•    $2 gas margins over 50%.
•    Went to $70 in early July, ended at $45 by September.
•    CF to exchange $7.4B of stock and assumed debt and cash for OCI NA and European nitrogen/methanol facilities. 2016 close data. Enables a tax inversion.
•    Over-levered copper companies which are going to zero rising 50%, yet stuff like CF dropping doesn’t make sense.
•    HSR approved yesterday and the stock dropped, not understood by the market.
•    By February should be closed.
•    CHS Co-Op – sold a minority stake at a premium. CHS canceled a 3.1BB nitrogen plant. Instead will invest 2.8B in CF for 9% of CF’s pre OCI deal production.
•    Deal values CF equity at ~$107.
•    Combined market cap of $17B. 3-5B of EBITDA post deal.
•    Cash flow from ops after mcapex of $1.8 to 3.2B.
•    Product capacity of 25.1MM short tons.
•    Will use FCF to return to shareholders.
•    Take five years to build capacity so nothing to do with money.
•    CF is not a mining company.
•    Short Mosaic (MOS), Potash (POT), Agrium (AGU), K&S as a hedge. Negative on markets and commodities.
•    Also is long USD.
•    CF is 8th best performing stock over the past ten years behind apple.
•    EPS 5.5-6 dependent upon corn yields.
•    Street doesn’t understand this industry or the OCI deal.
•    Passport has an analyst with a Dow/GE background tracking this. Good edge.
•    CF has returned 11% of its market cap annually to shareholders, bouht back 35% of company since FY12. 2.3% div yield. Will probably buy abck more stock.
•    Sold phosphate biz (not great) to Mosaic.
•    Executives are buyers.
•    Will return $12Bn to shareholders over next four years. Mcap is 17B.
•    Can’t buyback stock now until deal closes.
•    Buybacks based upon flat prices.
•    Thinks commodity prices going down, USA might go into something that feels like a recession. Shouldn’t own most stocks. Want something confident in liquidity and management.
•    Trade long CF / short 2/3 MOS and 1/3 POT as a pair.


Check out the rest of the presentations from Invest For Kids Chicago 2015.

Dan Loeb's Third Point Buys El Paso (EP)

Dan Loeb's Third Point Offshore Fund is out with its monthly update on positioning and exposures. The key takeaway here is that Third Point has initiated a position in gas producer El Paso (EP) since the fourth quarter.

The second most notable takeaway is that Potash (POT) is no longer among their top holdings. The stock sold-off hard recently, so that could be the culprit. Or, perhaps they sold shares, other holdings appreciated in value, or they ramped up their stakes in other names; it's tough to discern.

Third Point's Top Positions

1. Gold
2. Delphi (both equity & debt)
3. Chrysler (multiple securities owned)
4. El Paso (EP)
5. LyondellBasell (LYB)


Some of the fund's top winners were gold, NXP Semiconductors (NXPI), El Paso (EP), Technicolor (multiple securities owned), and Williams Companies (WMB). Per their latest disclosure, Third Point also now owns multiple securities in NXPI after previously owning just the equity.

El Paso is the second gas related entity they've invested in recently. Third Point bought WMB in the fourth quarter, as did many other hedge funds. You can read about the investment thesis on WMB in the equity analysis section of our new issue of Hedge Fund Wisdom.

The top losers last month in Third Point's portfolio included Wells Fargo (WFC), BioFuel Energy (BIOF), CIT Group (CIT), Accuride (ACW), and Rentokil Initial PLC (RTO in London, RTOKY on the pink sheets). Wells Fargo also appears to be a new equity position for the hedge fund, unless it is a debt stake that has previously been undisclosed; the disclosure is unclear.

Overall, Loeb favors post-reorganization equities. In particular, he's been active in Smurfit-Stone Container (SSCC), opposing the takeover. LyondellBasell (LYB), another post-reorg equity, continues to be one of Loeb's largest positions.

For the month of February, Third Point was up 3.6% and is up 7.6% for 2011 thus far. Its Offshore Fund has now seen an impressive 19% annualized return since inception in December 1996.


Exposure Levels

Regarding their latest exposure levels, Third Point is 56.2% net long equities with its largest net long exposure in basic materials at 12.1% and consumer at 11.5%. Over the past month or so, Third Point has reduced net long equity exposure by almost 5%.

In credit, the hedge fund is 11.5% net long distressed, 16.5% net long asset backed securities (ABS) which include residential mortgage backed securities (RMBS) and commercial mortgage backed securities (CMBS). They are also net short -5.4% government securities, cutting their short exposure to this asset class almost in half.

For a full assessment of Loeb's portfolio and the investment thesis behind some of his picks, head to the brand new issue of Hedge Fund Wisdom that was just released.

Dan Loeb & Third Point's Latest Positioning & Exposure

Dan Loeb's Third Point Offshore Fund recently released its January performance and the fund was up 3.9% for the month compared to a 2.4% return in the S&P 500. To date, Third Point has seen 18.9% annualized returns with a low correlation to the market (0.42).

Equity Exposure

In equities, Loeb's hedge fund has its highest net long exposure in basic materials at 16.4% net long. Their second highest exposure comes with a 12.9% net long position in the consumer sector. In total, Third Point is 68.9% long and -7.9% short, leaving the fund 61% net long.

Credit Exposure

Loeb is 31.1% net long credit with his largest exposure in mortgage backed securities (MBS) at 19.3% net long. He is also 12.3% net long distressed and -10.1% short Government bonds.


Top Positions

As of the end of January, Third Point's top positions remain unchanged from previous months:

1. Gold (physical)
2. Delphi (multiple securities held)
3. Chrysler (multiple securities held)
4. Potash (POT)
5. Lyondell Basell (LYB)


Top Winners & Losers

Third Point's portfolio attributed positive performance in the month to shares of Potash (POT), Smurfit-Stone Container (SSCC), Massey Energy (MEE), NXP Semiconductor (NXPI), and Aveta. We recently highlighted how Third Point opposes SSCC's takeover and other hedge funds have been active in the name as well. SSCC is one of the many post-reorganization equities found in Loeb's portfolio. Last year we cited how Third Point likes post-reorg equities and just recently we noted that John Paulson likes them too.

Regarding his position in NXP Semiconductor, Loeb highlighted NXPI in a recent letter. The company is involved in near field communications and is seen as a prime play on mobile payments. Third Point also saw solid performance from its position in Massey Energy as the company received a takeover offer from Alpha Natural Resources (ANR).

Positions that negatively affected Third Point's portfolio last month include Gold, Brenntag AG (ETR:BNR), Mead Johnson Nutrition (MJN), African Barrick Gold (LON: ABG), and Accuride (ACW).

To learn to invest like this hedge fund manager, check out Dan Loeb's recommended reading list.

Perry Capital: Bargains Not As Plentiful, But Growing Amount of Event-Driven Opportunities

Richard Perry's hedge fund firm Perry Capital is out with its 2010 year-end letter to investors and Perry Partners International finished last year up 16.21% (more 2010 hedge fund returns here). Perry's letter places emphasis on the fact that they don't necessarily abide by economic forecasting as much as other market participants. Instead, they focus on event-driven value investing in both equities and debt and have seen an annualized rate of return of 12.28%.

Perry's Targeted Investments

The hedge fund seeks to invest in securities that fall into various categories:

- "Capture most of the bell curve's area as a positive outcome for our investments"

- "Look for securities that do not suffer huge losses from unfavorable future economic outcomes (truncate the left tail)"

- "Buy securities that offer outsized rewards versus risk on favorable outcomes (bulging right tail)"

- "Find investments with little or no correlation to the economy that have positive expected value"

Looking Ahead in 2011

For this year Perry notes that, "Bargains are not as plentiful and dislocations are fewer today than a year ago. However, there is a growing amount of event-driven investing as we start 2011. Expectations about GDP growth and the market are almost euphoric ... This remarkable rally, as usual, has led investors to be more comfortable with the market at these higher levels than at the bottom. That is the nature of the market."

Potential Risks

As such, Perry Capital maintains numerous hedges on potential tail risk events. Baupost Group's Seth Klarman has done the same. Perry has protection against: European sovereign and banking issues, inflation in developing markets, and they are also concerned about the US Treasury and municipal bond markets.

Perry is not alone in their worry as we pointed out fellow hedge fund Kleinheinz Capital also thinks inflation is the biggest threat to emerging markets. Perry is particularly concerned about food and energy inflation and notes that increases in wage and input costs are resulting in higher finished product prices.

Fourth Quarter Portfolio

Below are excerpt's from Perry Capital's letter regarding some of their investments:

"Our position in Delphi equity continued to march higher. The company has performed quite well since exiting bankruptcy and, despite significant appreciation, we continue to hold our position. Delphi is well positioned as an automotive supplier - diesel, power train, safety and infotainment - with the best balance sheet in the industry." Market Folly readers will recall that Dan Loeb's hedge fund Third Point also owns Delphi.

"Universal American (UAM) was also one of our top performers in the fourth quarter. On December 31st, UAM stock increased approximately 40% on the news that CVS Caremark had agreed to acquire UAM's Medicare Part D plan for $1.25 billion. Subject to shareholder approval (likely in Q2 2011), UAM shareholders will receive $12.80-$13.00 for the Part D plan along with one share of the NewCo (remaining Medicare Advantage business), which will have approximately $8 per share of statutory capital upon separation."

Perry also had previously invested in Potash (POT) during the company's potential takeover by BHP Billiton (BHP). They exited their position before the Canadian government opposed the offer, anticipating (and jumping in front of) a potential heavy hedge fund sell-off. They were subsequently able to re-buy.

"We were able to re-establish a sizeable position after the arbitrage sell off at $138-139 per share, and hedged it using comparable companies that had traded up during the recent strong commodity price move. Fundamentals have continued to improve for Potash and we maintain a position in the shares." Dan Loeb's Third Point also has a sizable stake in Potash.

Lastly, Perry Capital invested in the AIA initial public offering (IPO), a wholly owned subsidiary of AIG (AIG). We've detailed how Bruce Berkowitz's Fairholme Capital also bought AIA in the IPO. Perry writes,

"AIA is a unique asset with hard-to-duplicate exposure to underpenetrated Asian markets that have had a high growth profile ... In our view, the IPO came at a meaningful discount to fair value due to i) its size, ii) poor execution during 2008-2009 due to issues associated with AIG, and iii) the AIG overhang caused by its remaining stake. Our investment paid off as AIA got rerated relatively quickly after the IPO."

That wraps up the main takeaways from the hedge fund's letter. Keep in mind of course that you can view Perry's latest portfolio in the new issue of our Hedge Fund Wisdom newsletter in a couple of weeks.

Dan Loeb & Third Point's Latest Exposure Levels

Dan Loeb's Third Point Offshore Fund finished 2010 up 33.5%, compared to an S&P 500 return of 15.1%. Since inception in December of 1996, Third Point has returned an impressive 18.6% annualized. The hedge fund manager recently released its latest December exposure levels so we wanted to provide readers with an update.

Here are Third Point's top holdings as of year end:

1. Gold
2. Delphi Corp (multiple securities held)
3. Chrysler (multiple securities held)
4. Potash (POT)
5. Lyondell (LYB)

You can learn about more of Third Point's investments in our newsletter. Physical gold continues to be a massive position for Loeb and he potentially could be using the precious metal as some sort of tail risk hedge. Interestingly enough, Third Point continues to own Potash (POT) even after BHP Billiton's bid for the company failed. It appeared as though the hedge fund originally purchased POT as a arbitrage trade but maybe they like the natural resource exposure as an inflation play. Or maybe they still see the company as a viable takeover target, who knows.

Lastly, Lyondell finally shows up as a top holding for Third Point as the company exited bankruptcy. The chemical maker's equity now trades under ticker symbol LYB. Back in the second quarter we noted Loeb's fondness for post re-organization equities, and that portfolio theme continues.

Exposure Levels

Third Point has its highest net long equity exposure in basic materials and financials. In total, they are 60.1% long, -8.4% short, leaving them 51.7% net long equities. One geographic note is that Third Point had previously been net short the Asia region, but are now net long ever so slightly.

In terms of credit exposure, Third Point has its highest net long exposure in mortgage backed securities (MBS) at 19.4%, followed by distressed at 14.2% net long. Third Point is also net short government securities at -10.9%. Overall in credit the hedge fund is 32% net long.

Top Winners

In Loeb's portfolio, big winners include Delphi (multiple securities held), NXP Semiconductor (NXPI), Lyondell (LYB), Chrysler (multiple securities held), and Accuride (ACW). He highlighted NXPI in his recent letter to investors as Third Point participated in the IPO and sees upside in the name. Shares of Accuride also recently started trading in late December after re-listing on the New York Stock Exchange.

Top Losers

Third Point's portfolio saw weak performance from the following plays: three undisclosed short positions (undoubtedly due to the market's large rally), Fortis (multiple securities held), as well as State Bank of India (BOM:500112), a name we have previously not seen disclosed.

That wraps up our summary of Third Point's end of year exposure levels. You can check out more of Third Point's portfolio in our newsletter. And to learn to invest like Dan Loeb, check out his recommended reading list here.

Dan Loeb Discloses Gold Bullion and Potash (POT) Positions

For September, Dan Loeb's hedge fund Third Point was up 3.9%. Year to date for 2010, their offshore fund is up 19.1%. Third Point's annualized return now sits at 18% with a correlation to the S&P 500 of 0.41 and a Sharpe Ratio of 1.27. To follow in his successful footsteps, check out Dan Loeb's recommended reading.

In a monthly disclosure to investors, Loeb's portfolio reveals some interesting new plays. At the end of September, Third Point's top positions were:

1. Chrysler (multiple securities)
2. Gold Bullion
3. Delphi Corp (multiple securities)
4. Potash (POT)
5. CIT Group (multiple securities)

The most notable change right off the bat is the listing of gold bullion as Third Point's 2nd largest position. As far as we're aware, Loeb has not owned gold since around the beginning of 2009 when he utilized it as an uncertainty hedge. This position was not present in the previous monthly disclosures from the hedge fund so its fresh appearance is duly noted.

Many investors will be curious as to his rationale for the position. In Third Point's latest letter, Loeb outlined how the firm had put on numerous "asymmetrical trades using derivatives, options and debt securities to hedge against extraordinary global events." They are allocating 1% of fund assets per annum to this protection. In late 2008 and into the first quarter of 2009, Third Point utilized gold (among other things) as 'doomsday and fat tail risk' trades. Gold bullion could again be a part of that basket, but they might have purchased for other reasons too, there's no clear answer.

The second notable portfolio change is Third Point's addition of Potash (POT) to the portfolio in size. As their fourth largest holding, this stock is an arbitrage play. Potash received an unsolicited buyout offer of $130 per share from BHP Billiton (BHP). Shares currently trade above the offer at $141 as speculation grows a bidding war will emerge or BHP will raise their offer.

Third Point's recent winning positions include: Lyondell (LALLF), a post-reorganization equity that many hedge funds have been fond of, including Jamie Dinan's York Capital. In Loeb's second quarter letter to investor, he asserted his fondness for post-reorganization equities and mortgage exposure. Loeb's fund also saw positive performance from their Anadarko Petroleum (APC) stake, a position we revealed after the unfortunate Gulf oil spill. Other winning stakes for Third Point include NewPage Corp and Liberty Media Corp Interactive (LINTA). Losing positions for the firm consist of four undisclosed short positions.

Back in the second quarter, we noted that Third Point reduced equity exposure. That theme is largely still prevalent as the hedge fund is only 26.3% net long equities. They are net short energy at -0.3% and their largest net longs are consumer at 7.9% and financials at 5.9%. In credit, we see a new position as Third Point is net short Government at -14.4%. They are net long mortgage backed securities (MBS) at 19.5% and distressed at 15.8%. In terms of other portfolio positions, we noted how both Loeb's Third Point and David Einhorn's Greenlight Capital recently provided a bridge loan to BioFuel Energy (BIOF).

Mohnish Pabrai Adds Capitalsource Equity: 13F Analysis

This post is part of our series on hedge fund portfolio tracking. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.

Next up in our series is Mohnish Pabrai and his Pabrai Investment Fund. Yesterday we kicked off our series by examining the portfolio of Seth Klarman's hedge fund Baupost Group and today we're focused on another value oriented fund. Pabrai's Investment Funds had a rough 2008 but rebounded well in 2009. His PIF2 finished up 122.5%, PIF3 up 125%, and PIF4 up 118.8% as noted in our 2009 hedge fund performance numbers post. In the past, we've also posted up Pabrai's third quarter investor letter where you can read his insight.

Pabrai is unique in that he has structured his fund similarly to the early Warren Buffett partnerships. Typical hedge funds charge a flat 2% management fee on assets and then a 20% performance fee incentive on top of that. Pabrai on the other hand charges no management fee and then no incentive fee until the fund reaches 6%+. After that threshold is reached, they can then charge a 25% incentive fee. So, his interests are aligned with the fund as he does not make money until investors do. Pabrai will be speaking at the upcoming Value Investing Congress along with numerous other hedge fund managers and Market Folly readers can save 33% with discount code P10MF6.

The positions listed below were their long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. Note that we are only covering the major portfolio maneuvers. All holdings are common stock unless otherwise denoted.


Brand New Positions
Capitalsource (CSE)


Increased Positions
Fairfax Financial (FRFHF): Increased by 17.2%
Cresud SACIFYA (CRESY): Increased by 5.3%
Potash (POT): Increased by 4.45%


Reduced Positions
Pinnacle Airlines (PNCL): Reduced by 4.9%
Berkshire Hathaway (BRK.B): Reduced by 1.54%
Harvest Natural Resources (HNR): Reduced by 1%


Removed Positions (Sold out completely):
Ternium (TX)


Top 15 Holdings by percentage of assets reported on 13F filing

1. Potash (POT): 11.46%
2. Teck Cominco (TCK): 10.98%
3. Harvest Natural Resources (HNR): 9.23%
4. Brookfield Properties (BPO): 8.91%
5. Fairfax Financial (FRFHF): 8.82%
6. Cresud SACIFYA (CRESY): 7.73%
7. Berkshire Hathaway (BRK.B): 6.56%
8. Leucadia National (LUK): 5.87%
9. Goldman Sachs (GS): 5.84%
10. Horsehead Holding (ZINC): 5.40%
11. Air Transport Services (ATSG): 4.44%
12. Pinnacle Airlines (PNCL): 4.31%
13. Capitalsource (CSE): 3.49%
14. Terex (TEX): 3.28%
    
15. Wells Fargo (WFC): 3.15%
    

As you can see, there's really not much turnover in Pabrai's portfolio and that is to be expected given his long-term investment timeframe and Buffett-esque value focus. The most notable activity in his portfolio would be the addition of Capitalsource (CSE) equity. As we detailed yesterday, Seth Klarman's Baupost Group is also fond of CSE.

Some other facts worth noting here: Mohnish Pabrai's top three holdings all represent natural resources and energy and represent a decent chunk of his portfolio. His investment in Harvest Natural Resources is a 16.9% stake in the company. Secondly, Pabrai's exposure to Pinnacle Airlines represents a 11.3% ownership stake in the company. However, that figure included a very small position in call options that were set to expire on January 15th, 2010 with an exercise price of $20 per share. Obviously, those options have already expired, but since this 13F filing details positions as of December 31st, 2009 we won't see what happened with those options until a future disclosure.

For more insight from Pabrai, check his investment ideas out at the upcoming Value Investing Congress with a 33% discount here (code P10MF6). Assets from the collective holdings reported to the SEC via 13F filing were $320.5 million this quarter compared to $322.9 million last quarter. Remember that these filings are not representative of the hedge fund's entire base of assets under management. Therefore, the figures above represent the percentage of their reported 13F assets, not their entire portfolio.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group so check back daily for our updates.

Ag Stocks Dropping Further?

That's what our buddy UpsideTrader thinks. He recently posted up two charts of Potash (POT) and Monsanto (MON). On POT, he predicts that it will fill the gap all the way down to $40 or so. And, on MON, he has drawn a line in the sand at around $68 and says to get short if the stock breaks down below that level on significant volume.

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Potash (POT) Poised to Benefit Should Hedge Fund Worries Subside

If you want to understand why Potash (POT) has been such a solid performer over the past year or so, all you have to do is look at simple supply and demand. And, Potash (POT) has done just that in their Market Analysis Report released on August 29th, 2008. They've assembled a slideshow of charts that illustrate the very pricing power they are seeing in their industry. Demand is rising and supply is falling. This industry is easily one of the strongest groups fundamentally right now because of secular trends. But, due to hedge fund redemptions/liquidations and the commodity sell-off, this name has been inexplicably sold off along with any and all energy or commodity related names. In a market where logic and fundamentals have been thrown out the window, it may be best to stand aside and let the chaos pass. But, when/if/should normalcy return to the financial markets, POT is poised to benefit simply because they actually have a strong fundamental story behind them.

Such strong fundamentals have been illustrated with charts extracted from Potash's latest Market Analysis Report:

Firstly, we see Global Grain production and fertilizer use increasing.

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Secondly, we see worldwide fertilizer demand growth: "Recognizing that without sufficient potash they cannot raise their yields – no matter how much N and P they apply – farmers have raised their potash consumption an average 5.6% per year for the past five years. This compares to 2.7% for N fertilizer and 3.8% for P. Over the past five-year period cumulative world fertilizer growth has been greater than adding a market the size of the US or India, the second and third largest fertilizer markets."

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Thirdly, we see that potash ending inventory has decreased each year for the past 3 years.

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Additionally, commentary from their Market Report reads,

"Potash is used on a diverse group of agricultural commodities. Wheat, rice, corn, soybeans and sugar cane consume roughly 50% of the world’s potash. This diversity means that global potash demand is not highly dependent on the market fundamentals for any single crop or growing region. US use of corn for ethanol has grown in recent years but this segment of market accounts for only 2% of world potash consumption. The global potash industry is operating at historically high rates to meet the significant growth in potash demand. With the industry running at or near full capability, world production in 2008 is expected to be limited to an increase of only 2.0-2.5%. This (production) is well below the 5.6% demand growth rate of the past 5 years."

So, simply put, fertilizer demand is outpacing supply.

In addition to the supply/demand equation tilting in Potash's favor, they are also seeing more favorable input costs. Natural Gas is one of the main agricultural input costs. And, as you've witnessed this summer, prices of natural gas have fallen hard 40%. So, this can only further POT's bottom line. And, if for some reason you still need further reassurance that the agriculture boom is still in play, just turn to analyst comments from Morgan Stanley. They say that the selloff in these names is "unfounded" and that they expect peak earnings around 2011. They rate Potash (POT) "Overweight" with a $297 price target (POT is trading around $180 now).

Additionally, as NotableCalls mentions (re: Morgan Stanley analyst comments),

"Fertilizer prices will stay higher for longer: i) A global economic slowdown is unlikely to affect fertilizer demand; ii) US farmers are still earning a ~60% ROIC on fertilizer purchases and are thus unlikely to reduce fertilizer application; iii) Emerging market farmers are very low on the yield response curve (i.e., increased application pays for itself); iv) NPK prices have yet to catch up to commodity prices (i.e., record US farmer profits despite higher NPK prices); and v) They believe capacity increases will simply meet underlying demand rather than flood the market and force lower prices. Valuation extremely compelling: 2009e EV/EBITDA of 2-5x; FCF yields of 10% to 20%. Minimal balance sheet leverage (in some cases none) should allow for substantial share repurchases and dividend payments. POT has the most leverage to potash, the nutrient with the greatest pricing power and barriers to entry."

So, the real dilemma here is trying to decide whether to enter POT at these levels given the market uncertainty. Hedge funds closing their doors like the Ospraie Fund are forced to sell their positions. And, if they are heavily invested in fertilizer/energy/commodity names (as many of them are), you can guess what that means for the stocks. Given the fact that we have seen numerous commodities and macro hedge funds negatively affected by the commodities sell-off, one would have to think that further hedge fund redemptions or liquidations are in store, as I wrote about here. Additionally, Nouriel Roubini seems to think the next step of the crisis will be the de-leveraging of hedge funds. But, it would still be hard to envision a commodities selloff as great in magnitude as the one we recently saw, given the already vast depreciation in equity prices.

Trading at just an 8.37 forward PE, POT is very compelling here. The bulk of the gains come from solid operating margins of 41.29% and return on equity of 37%. They are seeing year over year quarterly revenue growth of 102.30% and year over year quarterly earnings growth of 216.80%, both massive figures to say the least. The only major negatives would be their $2.27 billion in debt, compared to $269 million in cash. But, one could easily argue that since POT is essentially printing cash with their business, that their debt is not worrisome at all. In the end, their debt/equity ratio comes in at around 0.34. Lastly, we see that around 77% of shares are held by institutions. And, among those institutions are numerous hedge funds we track here at Market Folly. Firstly, $10 billion global macro hedge fund Moore Capital Management (ran by Louis Bacon) owns POT, as we noted in our recent hedge fund tracking piece. Additionally, POT is owned by $10 billion Maverick Capital (ran by Lee Ainslie), whose portfolio holdings we analyzed here. And, last, but not least, we also noted that George Soros had been purchasing Potash (POT). Now, I don't believe these funds are in jeopardy of massive hedge fund redemptions/liquidations as I referenced earlier. But, at the same time, anything can happen these days and there are undoubtedly numerous highly leveraged funds out there waiting to explode/de-leverage.

So, we really are at a crossroads here. On one hand, the fundamentals are screaming "buy," as the supply and demand picture only gets further squeezed, since new potash cannot be brought online for years. But, at the same time, you run the inherent risk of POT being sold off ridiculously hard again should a bunch of hedge funds face redemptions or liquidations as many are forecasting. So, the inherent risk here is not company specific, nor sector specific, but rather financial market specific. The fundamentals are in-tact and that's all that matters. But, with some hedge funds teetering on edge, things can swing either way. Value investors and deep fundamentalists will tell you that even if you have to go down through a valley before getting to the mountain top, it's still worth going through for the opportunity. But, given the recent market volatility and unpredictability, exercising some caution can never be a bad thing. If the saying holds true that fundamentals trump all, then buying POT now could payoff large come 2010 and 2011. This must be what it feels like to be a value investor, huh?

Sources: NotableCalls & Potash Market Analysis Report

Potash (POT) Sitting on Long Term Trendline

I've been seeing a lot of people concerned about the action in the agriculture sector, namely fertilizer stocks. Just wanted to post up that while yes there is some concerning action in those stocks, the long term trendline is still in tact. And, that's all I'm concerned about. We all know these companies are still firing on all cylinders, as evidenced by the blowout quarters they just reported. The market, though, likes to sell off anything remotely commodity related; that's just how it is. As Lawrence so effectively points out: until the long term uptrend is broken, these stocks are still manageable.

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We are currently right around the long term trendline. You can buy around $168/169 and then stop out around $165 if you want a tight stop or $159 if you want a less conservative stop. These fertilizer names are on the verge of a major technical breakdown. And, although we love their story fundamentally.... you've got to adhere to the price action we're seeing.

Fertilizer

UBS is either still behind the times or they have finally started creating earnings models that are at least somewhat accurate. Only reason I point this out is because they have raised price targets on Potash (POT) and Agrium (AGU) yet again. Just last month, UBS raised its price target on Potash from $250 to $285. Then, today (not even a month later), they are out raising their price target on Potash from $285 to $320.

Additionally, a month ago UBS raised the target on Agrium (AGU). They raised its price target on the stock from $95 to $118. And, not even a month later, they are out boosting price targets today on the name again, this time from $118 to $130.

So, in 2 months time, UBS has raised POT's price target from $250 to $320 and AGU's price target from $95 to $130.

Clearly, some people (analysts, ahem) have been underestimating the true pricing power the fertilizer names have. Very limited supply + very strong demand = fertilizer company pricing power. Its really a simple concept, yet analysts and investment firms are just now latching on to the true potential these producers have. The prices simply keep going up because there is huge demand for it worldwide. Not to mention, an already limited supply becomes that more valuable because new supply cannot be brought to market for years (2012-2015) due to how long it takes to bring a new potash mine online.

Combine all of the above with the fact that these fertilizer companies are now selling potash to Asian buyers at a spot price of $1000 per tonne and you've got a huge recipe for success. Even with a slumping American economy and an overall bear market, there are bright spots to be found. Use any weakness in these names to add (or establish) your position.

This is the definition of secular growth.

Monthly Performance: June 08

Paul Kedrosky posted up this lovely breakdown of the worst "June" returns on the Dow in History. And, although the month indeed was bad, it didn't necessarily feel that way. We never saw true panic, we never saw capitulation. Instead, we saw stocks slowly bleed it out. And, that led us to a month where the S&P500 was -8.60%. And, halfway through the year, the S&P sits at -12.5% YTD. But, for those of us with some sense and a solid gameplan, the month wasn't so bad. Why, might you ask? Well, because we saw this coming a mile away. We know the U.S. is still in a recession, we know the housing sector is accelerating to the downside, we know oil is setting record highs, and we know that the financials are still sorting through the rubble of the credit crisis. We are by no means out of the woods yet and my portfolio has been based on that for quite some time. I figured I would start posting up my monthly performance here, to stick with my theme of complete transparency. (Well that and the fact that I had a pretty damn good month and this seemed like an ideal time to brag, er I mean start logging my results on the blog haha). For the month of June, MarketFolly's portfolio was up 5.56%. And, year to date, the portfolio is up 10.5%.

Since I've now turned to focusing on absolute return rather than relative return, I'll leave you to do the math in terms of outperformance. And, as a matter of fact, after having some discussions with numerous absolute return portfolio managers, I've come to the conclusion that people still pay attention to the indexes no matter what. Even if absolute return technically has no metric for comparison, you still want to be outperforming the next best alternative (ie: stocks, bonds, cash, or other alternatives). And, the next best alternative could very well be the indexes on certain months, you never know. In the end, its all about semantics and just depends on the portfolio managers absolute return goals. There will always be people who will want to compare results to the indexes just because that is what has been ingrained in everyone's mind to begin with. As long as I know my goals in running an absolute return portfolio, then relevant return is meaningless and is just a moot talking point. I'm very happy with my results thus far, but I can merely attribute it to creating a gameplan and sticking with it. I didn't panic and I stayed disciplined. That is one of the most valuable lessons you can learn when dealing with financial markets.

The macro themes we've seen have continued to play out. Housing sucks, financials suck, the dollar sucks, the economy sucks, and commodities are roaring. Many of the gains for me this month are attributed to taking a strong round of profits in my Natural Gas (UNG, CHK) and Coal (ACI, MEE) names. Additionally, I locked in profits in the fertilizer plays at the new highs (POT, MOS) and then am starting to buy them back here down at these levels. Additionally, I have been shorting the market itself through SDS, which is the etf for Ultrashorting the S&P500. It seeks twice the inverse performance of the S&P. So, if the index goes down 1%, SDS should theoretically go up 2%. I usually use this (and a few other etf's) as a 'hedge' in my portfolio, layering in and out when the market makes drastic moves one way or the other. For instance, in the bear market rally we saw leading up to this recent decline, I was adding heavily to the SDS, seeing as I knew we were still in a bear markets and the charts showed this clear as daylight. And, I posted this chart a few weeks back reminding everyone we were still in a downtrend here :
And, if we pulled up that same chart now, you would see we have fallen another 50 points on the S&P. The green circle below shows what happened to the S&P in the few weeks after I posted the original chart above. Here's what things look like currently:
In the end, everything played out like we anticipated and locked in some nice gains. I have now been taking profits in SDS as I feel we are due for an oversold bounce (and apparently everyone else feels this way too, which is concerning.... but that's a whole different conversation).

The rest of the gains this month were due to some shorter term moves I had made, most notably with Capital One (COF). I have been in and out of this name on the short side, as I feel they truly have the most exposure to the 'next leg' of problems in the financials: increasing credit card receivables/rising delinquincies & bad auto loans. COF has exposure to both and is having problems. This name has been a major component of the short side of my portfolio, to ensure I'm truly hedged. And, what better way to reap the gains than to short a financial, right? My thoughts exactly. (Note: I've covered the last of my position last week and I am no longer short this name, but I will be looking to re-short on any major pops). I didn't actually blog post about this name in my portfolio, but I did 'tweet' about it numerous times on twitter (here's an example and here's another). So, this just goes to show why you should be following me on twitter! Or at the very least, reading the twitter posts that stream as I post them on the upper right hand corner of my blog. Here's a chart outlining my entry and exit from this name:So, as you can see, all I did was stick to the gameplan and watch the charts for excellent entry/exit points in terms of risk/reward. I realize that these plays could have easily gone against me and continued to rally. But, if they did, I would have been stopped out right above the moving averages, and no harm done. It's all about knowing your risk/reward before even entering a position. For me, this month can be summed up by patience. The whole rally in the indexes from the middle of March until May was simply a rally in the midst of a bear market. I waited patiently until it found resistance, and then entered some short positions in financials (COF) and the market in general (through SDS). I continued to hold my fertilizer, coal, natural gas, and resource plays as they continued to benefit while the overall market struggled. Now, having taken profits in these names, I'll be waiting for pullbacks to re-enter the strong sectors of the market.

Next up: July. Will we see an oversold bounce? Will we continue to bleed it out slowly? Who knows. All I know is I'll be monitoring things closely, waiting patiently to set up my next move based on what happens at this test of support/the March lows on the indexes.