In the debate between technical and fundamental stock analysis, Cramer’s always sided firmly with the latter. He trusts a company’s earnings and business environment more than anything that could be seemingly divined from a stock’s performance chart. But right now the market is in these technicians’ hands, so it would be careless to disregard the influence they have.
This week Cramer will highlight the market’s top five stock charts and analyze them from a technical and fundamental perspective, giving investors the chance to see what each approach has to offer and what its limitations are. First up: Potash , the fertilizer name that many on Wall Street say has the best chart out there.
POT’s attractiveness can be seen in the stock’s refusal to pull back after surging 60% between Dec. 4 and Dec. 17. That is, excluding the 12% loss seen Monday after a negative USDA report on corn stocks. (But Potash wasn’t alone. The whole fertilizer sector took a big hit.) Most would expect some kind of decline after such a big move, but POT actually climbed another 5% between then and the Friday, Jan. 9 close. This means, Cramer said, that the present shareholders are committed investors, not short-term traders, and buyers are so impatient to get this stock that they’re not waiting for it to go on sale.
Take a look at the pattern of highs and lows, too. After falling 80% in the last two quarters of 2008, shareholders have stopped selling into rallies. They’re aggressively buying POT. The chart shows an increasingly committed investor base since the Oct. 2 low. This trend is something fundamentals-based traders would miss. But with so many money managers focused on charts right now, it’s too important to overlook.
Potash’s most recent low registered at $65. Believers in the technical thesis, that buyers see POT moving higher, will be right if the stock stays above that level. So investors want to buy in as close to that price as possible. However, a dip below $65 means the chartists are wrong. Cramer’s problem with this is that a stock worth owning at one price is worth owning even more when that price goes lower. But technical analysis suggests cashing out, which seems to encourage buying high and selling low.
The fundamentals also suggest that Potash is a buy. Analysts have, over the past three months, sharply cut estimates for the fertilizer group. Demand declined, and capacity increased. But that capacity has since been reduced, evening out the supply-demand balance and pushing prices higher. Plus, seed maker Monsanto reported a strong quarter last week, saying that the upcoming U.S. planting season should be strong. And where there are seeds, Cramer said, there is fertilizer. Then there’s the worldwide food shortage and President-Elect Obama’s commitment to ethanol. So bullish trends are taking shape for the agriculture business.
Even still, despite two thumbs up from two different investing schools, Cramer would rather see investors in Terra Nitrogen than Potash. Terra’s climbed 12% since his Nov. 3 call, and it held up best against today’s decline of all the fertilizer names. There’s also the huge dividend yield – 15% – offering investors some defense against a still volatile market. Terra has the most exposure to corn, which requires double the fertilizer that wheat does to grow, and the company’s nitrogen-based product is much cheaper to make now that natural gas, a key ingredient, is so low.
So use Monday’s pullback to buy more TNH, Cramer said. And look to build a bigger position if the decline continues.
Join Cramer live in the studio for Mad Money: The State of Cramerica, a special town hall-style show on Wednesday, Jan. 21. Get your free tickets here!
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