Tuesday's Pair Trade: Fertilizer Providers
BMO Capital Markets released another set of ratings Tuesday morning that created a potential pair trade.
The report stated that trading was turning toward potash fertilizer providers as potash fundamentals had bottomed. While it was stated that fertilizer stocks could be pressured by corn futures, global phosphate sentiment and prices give a bullish case for potash.
The report mentioned that at the end of May, Mosaic will be able to negotiate with Cargill shareholders to repurchase shares. Much of the recent run-up has been linked to this expected buyback, so this could present a potential downside to BMO's bullish thesis on the equity if the buyback does not occur.
The case for the downgrade centered around some strong headwinds that nitrogen producers face in the form of rising gas prices and weakened urea/ammonia sentiment. Despite the expectation for a strong first-half of 2013, the stock was highlighted as pushing toward an overvalued price.
The recommendation was to take some profits off the table on nitrogen fertilizer companies like Agrium and rotate into potash companies such as Mosaic.
This presented an opportunity to play the volatility of that rotation, and go short Agrium and long Mosaic to simply play the volatility here, and is the second pair trade that BMO ratings have set up in two days.
Following the reports, Agrium has traded down 3.01 percent to 103.98, while Mosaic has risen 0.75 percent to $61.98.
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