Cyclical stocks can be tough to own unless you get the timing right. If you’ve got the patience to wait for a cyclical upswing, though, the rewards can be massive.
As such, it makes sense to place a bet on a down-and-out cyclical firm that’s already endured a cyclical downturn with shares that are substantially lower than that of historical average valuation metrics.
Still, there’s no guarantee that the next upcycle will come to be within an acceptable time frame after you’ve purchased shares.
Buy-and-pray is not an effective strategy, however, especially when it comes to cyclical firms that are overly reliant on exogenous factors like a commodity producer that’s suffering from a low commodity price environment.
Unless you’re a commodities trader, however, it’s nearly impossible to pinpoint when catalysts will cause the tides to turn. However, as a patient investor, you won’t need to know exactly when the tides will turn if you’re adequately compensated as you wait for positive change.
Buy shares of a free-cash-flow-generating cyclical firm that pays a large, growing dividend and you’ll find it’s easier to remain patient you ride out the bottom of a cyclical downturn.
Consider Nutrien (TSX: NTR)(NYSE: NTR), a fertilizer kingpin that’s one of the year’s biggest losers, with shares in the black for the year and down around 15% from 52-week highs.
The 3.77%-yielding stock has been growing its dividend at a steady single-digit rate since its inception after the merger between Potash Corporation of Saskatchewan and Agrium.
Although a vast majority of meaningful synergies are in the rear-view mirror heading into 2020, there are reasons to be more optimistic with regard to potash prices over the next three years, as China and India could spark a wave of new demand to improve crop yields while past production cuts limit supply.
Nutrien has a massive 20-22% share of the potash market, with some of the lowest costs of production in the industry. While higher potash prices in the early 2020s would undoubtedly give Nutrien stock the lift it needs, Nutrien is a wonderful bet even if potash prices were to continue to drag.
Nutrien’s retail business, which sells supplies and services to farmers, accounts for nearly 50% of midcycle profits. Nutrien is acquiring its way into new markets like Australia with the acquisition of RuralCo.
As the company looks toward amping up its proprietary in-store offerings like Actagro, I do see margins trending upward, all else being static.
As Nutrien goes on the hunt for innovative new products like agricultural biologicals, more acquisitions should serve to further bolster the company’s moat, even amid a low commodity price environment.
A rapidly growing world population is paving the way for stronger long-term fertilizer demand, so Nutrien is slated to ride on long-lived secular tailwinds. Come the next upcycle, investors could have an opportunity to score massive gains alongside a stable and growing dividend.
The stock trade at just 9.6 times EV/EBITDA at the time of writing, so investors may want to initiate a partial position today as the stock continues to drag.
