Money is rotating into the so-called “reopen” plays — companies that will benefit as the economy rebounds in 2021; this includes cyclicals — one of my favorite areas, suggests Frank Curzio, growth and income expert and editor of Curzio Research Advisory.
Indeed, the best long-term strategy is to look for a combination of growth and value. We want to buy cheap stocks that have growth catalysts. And that’s exactly what I found for this month’s recommendation.
Mosaic (MOS) is an established fertilizer company. I’m not going to pretend that fertilizer is exciting. But I need to point out that we’ve made a lot of money buying “non-exciting” stocks lately. In this case, I see major growth catalysts for a stock trading at bargain valuation.
The company operates in the agricultural sector (the “Ag” space, for short). And 2021 is shaping up to be a big year for the industry. U.S. farmers should see rising demand from China, especially for grains to feed pigs and chicken.
There’s also a huge push into renewable diesel, which will create a surge in demand for corn and soybeans (the primary feedstocks for making renewable diesel). Plus, we’re going to see a big post-COVID rebound in the foodservice industry, which should benefit much of the Ag sector.
Mosaic’s two main products are phosphate (a crop nutrient) and potash (a fertilizer). When the Ag sector is booming, farmers need a lot of these two basic materials… which sends prices higher.
Back in 2008, phosphate prices soared to over $700 a ton. Shares of Mosaic exploded more than 220% in just 12 months. In fact, the company’s market cap soared to around $54 billion.
Today, the company’s market cap is back around $12 billion — basically where it was before the 2008 boom. It’s also trading at a super-cheap valuation around 12x forward earnings (vs. an average multiple of 20x for the overall Ag sector).
Mosaic’s stock took a hit in 2017. It paid $2.5 billion to acquire a bunch of fertilizer assets from Brazilian mining giant Vale (VALE). Investors hated the deal. They thought Mosaic paid way too much and the unit would be a disaster.
But after some initial headaches, Mosaic’s Brazilian fertilizer business is booming now. The company successfully cut costs, and Brazil’s agriculture market has steadily improved.
In short, Mosaic’s cheap valuation doesn’t make sense anymore. Its Brazilian operations are doing great. More importantly, it slashed expenses during 2020.
I love seeing companies get leaner during a downturn. When the economy rebounds, those cost cuts go straight to the bottom line. In other words, the company becomes much more profitable as sales start to recover.
I’m really excited about the setup I’m seeing in the Ag sector … and I think the market is undervaluing Mosaic by a lot. I think this could easily be a $60, $70, or even $80 stock within 12-18 months — with bigger upside potential if we see a boom in fertilizer prices similar to 2008.
