The strong rally over the past few months has wiped out many of the deals that were available at the beginning of the year, but some bargains remain.
Here are the reasons why I think investors with a bit of extra cash on the sidelines should consider Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) and Inter Pipeline Ltd. (TSX:IPL).
Potash Corp.
A slump in the global fertilizer market has hit Potash Corp. hard, sending the stock down 46% in the past 12 months.
What’s going on?
Potash prices are under pressure as battles for market share combine with low crop prices, drought, and volatile currencies to form a perfect storm in the market.
The wholesale potash market is served by a handful of giants, including companies based in Russia and Belarus. These two used to have a cozy marketing agreement that helped keep supplies in check, but the partnership fell apart a couple of years ago, and that has resulted in a nasty price war.
At the same time, low crop prices have reduced income for North American farmers and volatile currency moves have hit large buyers such as Brazil. To top it off, India is facing a severe drought in key agricultural regions.
Potash Corp. has responded by closing higher-cost facilities and reducing output. The company also slashed the dividend to bring it in line with expected earnings.
While the near-term prognosis isn’t great, the long-term fundamentals for fertilizer demand remain strong. Global food demand is expected to skyrocket in the coming decades, and that means farmers will have to use more crop nutrients to boost yield.
Potash Corp. is a low-cost producer and is at the tail end of a multi-year capital program, so the business is well positioned to benefit when the market recovers.
In the meantime, shareholders can pick up the stock at a reasonable price and pocket the 5.9% yield as they wait for better days.
Inter Pipeline
The oil rout has driven investors away from most names connected to the energy sector, but the sell-off in Inter Pipeline still looks overdone.
The company transports 15% of western Canadian oil production and 35% of the country’s oil sands output. These are difficult times for producers, but throughput remains strong.
Funds from operations for Q1 2016 came in 5% higher than the same period last year, and new infrastructure developments should boost revenue and cash flow in 2017.
Inter Pipeline also runs a liquids storage business in Europe. Utilization rates are at 98% and the company continues to expand capacity through organic growth and acquisitions.
The stock pays a safe monthly dividend of 13 cents per share that yields 5.8%.
