As I write this note, POT is selling off in a good market this morning, now trading down just under $114. I would be a buyer in this weakness. First a quick recap:
- On Dec 18, Scotia Capital went positives on Ag names on the back of raised estimates for China potash prices to $400/ton.
- On Dec 20, Barron's put out an article stating that Mosaic shares could rise 40% as arable land continues to decline and world consumption of food continues to go up.
- On Dec 21, Goldman Sachs upgraded POT to its Conviction Buy List. Specifically, Goldman said a "near-worst-case" scenario on 2010 potash pricing is reflected in potash valuations and that they continue to expect a fundamental potash demand recovery in 2010. GS price target is $138. 
- On Dec 22, National Bank Financial upgraded Potash to Outperform.
- On Dec 23, Belarusian Potash said it expects the American potash market to improve and that it is getting positive demand signals from Asia, according to Bloomberg. It also sees interest from Brazil for January potash.
- On Jan 5, Credit Suisse upgraded Potash to Outperform on the same thesis as Goldman Sachs with price target of $135.
- On Jan 6, Mosaic in its earnings report suggested increasing potash sales in 2010.
- On Jan 8, Bloomberg reported that the competitor K+S to increase potash prices by at least 10% Euros after Feb.
- On Jan 14, Barclays initiated Potash with Overweight rating and price target of $137.
- On Jan 15, RBC Capital raised price target of $150.
- Today, On Jan 19, Broadpoint provided positive commentary on potash demand.
So, that's plenty of positive commentary on the street. However, the reason why POT has taken a slight hit since last week is because Dec crop inventory report was weak and Citigroup and UBS used that as a proxy to go neutral-to-bearish on Ag names. But as other Tier 1 analysts have suggested, this story is about 2010 and not about what happened in 2009.
From technical standpoint, the daily chart gives us a great set up. There is a rising trendline that is nicely intact since early Nov. The support is clearly right around here at $114. I would be a buyer of POT at this level with a tight stop at $113.
If you want to do it through options, I like selling the following Bull Put Spread:
- Buy to open Feb $105 puts
- Sell to open Feb $110 puts
The trade can be done for $1.60 as I write this which provides approx 32% return by Feb expiration as long as the stock remains above $110.
For more conservative traders, a similar Bull Put Spread can be done using 100/105 puts which gives you more cushion to the downside and still provides approx 18% return by Feb expiration.
Good luck!
