Need proof of a certain East Asian economy’s crucial importance to the rest of a world? Then consider that just two straight weeks of copper inventory increases in London sparked a sell-off in American cyclical stocks like Freeport-McMoRan , Union Pacific and Caterpillar . Hence, the losses seen Wednesday in both the Dow and S&P 500.
“China’s in charge,” Cramer said Wednesday. It’s “the prism through which you have to look at this entire stock market.”
All of those companies had reported better-than-expected quarters just a week ago, but that didn’t matter when China cinched its order flow. Now, all commodity stocks – whether they’re exposed to China or not – are being dumped en masse. But therein lies an opportunity.
One group that’s less influenced by China’s whims is the fertilizer industry, which is why Cramer likes Potash . Despite reporting what he thought was a stellar quarter, the stock dropped $1.28 today even though only 12% of sales come from the Chinese.
Cramer likes the long-term trends for fertilizer. Rising population levels across the globe require more food, and a growing middle class demands a better-quality product, especially in meats. That should translate into more fertilizer to increase the crop yields that will feed the livestock needed to meet this demand.
Admittedly, farmers cut their orders for potash fertilizer by 40% in 2009, but that’s because of economic uncertainty. 2010, though, should see a much-needed turn. Soil can’t go longer than 12 to 18 months with reduced fertilizer before its productivity is reduced. So orders should see a rebound next year.
Why Potash over, say, Mosaic or Agrium ? Because POT sells the three main crop nutrients – potash, phosphates and nitrogen – making it a one-stop fertilizer shop, Cramer said. The company has great cash flow and net income, and the barriers to entry are high in this industry, as it costs upwards of $1.5 billion to open a plant. In this tight credit environment, new competitors should be rare. As a result, increased profits thanks to renewed demand should go straight to Potash.
Cramer does expect POT to continue to decline in price. But he suggested that investors use the dip to their advantage and pick up the stock at a discount. Buy a piece of your expected total holdings, he said, every time Potash loses five points on its share price.
“You want independence from Communist China?” Cramer asked. “I think you should take a look at POT.”
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