Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) has had a very impressive end to 2016; the stock seems to have found a bottom with a support level at $20 and enjoyed an impressive ride back up to just under the $24 level as shareholders show their approval for the merger with Agrium Inc. (TSX:AGU)(NYSE:AGU).
There’s no question that fertilizer prices are at a cyclical low, and many pundits, such as Chris Damas of BNN are referring to the fertilizer business as “dead money” at these levels.
There doesn’t seem to be any real short-term catalysts for fertilizer to rally, but if you’re a contrarian long-term investor, you will reap the rewards unlocked by the Potash-Agrium merger over the next few years.
Warren Buffett used to call stocks that have been beaten up beyond their true value as stocks with margins of safety. If you’re an investor with a truly long-term horizon, then this cyclical bottom in the fertilizer industry represents a perfect time to get into Potash Corp. while it’s still at its cyclical low.
Although it’s never a good idea to time the markets and try to get in before the spike, it’s always a great strategy to buy at historical lows with the hopes of selling at a higher price, which will inevitably arrive over the next few years.
Potash-Agrium merger to unlock great synergies
While it’s difficult to forecast where fertilizer prices will go from here, there are some great synergies to be unlocked from the merger of Potash Corp. with Agrium, which will become the world’s largest fertilizer company.
As we head into 2017, we can expect operating costs to go down thanks to Agrium’s ability to manage costs even during a rout in fertilizer prices.
Potash Corp. has a chance to rally further in 2017, but it could potentially take longer, as the synergies from the merger may not be fully realized until later.
As a contrarian investor, you can feel safe holding Potash Corp. at these levels, especially considering the huge margin of safety involved with owning the stock at such a cyclical low.
The stock is dirt cheap, but should you pick up shares?
The stock trades at a 1.8 P/B, which is much lower than both the five-year historical average value of 4.1 as well as the industry average value of 3.5.
The stock pays a nice 2.24% dividend yield. Investors can collect it as they wait for this company to rebound, which it inevitably will when fertilizer prices pick up and the synergies become unlocked over the next few years.
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Fool contributor Joey Frenette has no position in any stocks mentioned. Agrium Inc. is a recommendation of Stock Advisor Canada.