While long-term buy-and-hold investors may not pay close attention to seasonal trends, they would be wise to start—a seasonal trade by definition has a greater than 50% chance of being profitable (with some time periods for certain sectors being as high as 80%).
Seasonal investing refers to periods of strength or weakness that start and end at particular dates and typically recur over periods of a decade or more. If positive (or negative) returning periods occur over 50% (preferably above 70%) of the time during a multi-year period, an investment can be said to have a seasonal bias.
For long-term investors, this can help with initially entering positions (it is best to enter names before periods of seasonal strength, all else being equal) as well as with averaging down costs. Currently, both the fertilizer sector and the natural gas sector are about to enter periods of seasonal strength, and improving fundamentals in these sectors should only amplify the effect of seasonality in a few core names.
The fertilizer sector
Fall is historically a period of strength for fertilizer and agricultural stocks. In the United States, farmers typically plant crops during the spring and early summer and then harvest in October and November. As a result of the harvest, farmers typically have more cash on hand during the fall, which they then use to make fertilizer purchases in advance for the following year. Brazil, on the other, has a planting season in the fall, which supports demand.
Some fertilizers, such as nitrogen, are often cheaper during the fall compared to the spring, which makes fall purchasing a more economic choice. While crop prices are weak this year due to huge expected crop sizes—which should pressure how much income farmers receive—the higher yields and large decline in fertilizer prices will help to ensure fertilizers are still affordable for farmers going into this year’s seasonal strength period.
The cost of fertilizer has declined more than the price of crops over the past year, which will give U.S. farmers the highest return on potash fertilizer per acre since 2013.
There are two ways to play this trend. The first is through Agrium Inc. (TSX:AGU)(NYSE:AGU). Agrium enters a period of seasonal strength starting in late September. Between early October and the end of December, Agrium has returned an average of 13% over the past 19 years. Even more impressive is that this period has been profitable over 75% of the time over the past 19 years.
Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) is another option for investors. With the same period of seasonal strength as Agrium, Potash Corp. has demonstrated an average return of about 15% for the past 19 years. It is important to note that both of these names are not simply seasonal trades; they also make excellent long-term investments.
Agrium is benefiting from a winding down of capital spending, and driven by both organic and inorganic growth and crop/fertilizer prices near the five-year average, Agrium expected to see $10 per share of free cash flow by 2020. This is up from $8.59 last year. Potash Corp. shares are trading near multi-year lows and should benefit from a recovery in fertilizer prices.
Natural gas also benefits from seasonal trends
Natural gas is nearing the end of what is known as injection season—the period where supply exceeds demand and storage levels build—and is entering into withdrawal season due to more heating demand in the winter.
This winter could very well be colder than previous winters due to the La Nina effect, which could amplify an already strong seasonal trend. How strong? Between mid-September and mid-December, natural gas prices have risen by 30% over the past 20 years. You can play this with a name such as Birchcliff Energy Ltd. (TSX:BIR), which has over 80% exposure to natural gas and a fairly strong balance sheet.
