Hackett Advisors in the News

Lesser-Known Stocks to Play on Rejected Potash Takeover Bid by BHP Billiton

Justin Rohrlich August 17, 2010 10:30 AM|

       While everyone else concentrates on the household fertilizer names, one money manager highlights a few alternatives with greater upside potential.

The big agriculture news this morning comes by way of Potash Corp.’s (POT) rejection of an unsolicited $39 billion takeover proposal from BHP Billiton Ltd. (BHP), which was deemed too low, sparking feverish talk of a soon-to-come higher bid.

(See also, Potash Bid Raises Stakes for Ag Sector.)

Potash rose $37.85, or 25%, to $140 as of 6:51 a.m. in pre-market trading. Big names in the space, like Intrepid Potash (IPI) and Mosaic (MOS) also traded higher.

Potash, the world’s largest fertilizer producer, said no to a cash offer of $130 a share, with chairman Dallas Howe releasing a statement saying he “unanimously believes that the BHP Billiton proposal substantially undervalues Potash Corp. and fails to reflect both the value of our premier position in a strategically vital industry and our unparalleled future growth prospects.”

That future growth -- and consolidation in the fertilizer industry -- is expected to boom as the United Nations’ Food and Agriculture Organization said last fall, the global population balloons to 9.1 billion in 2050 from 6.8 billion today.

"Global demand for food is steadily increasing, creating an attractive operating environment for the entire fertilizer industry and, with our premier position, Potash Corp is uniquely poised to benefit," Chief Executive Bill Doyle said.

But, Potash isn’t the only company “uniquely poised to benefit,” according to money manager Shawn Hackett, founder and CEO of Florida-based Hackett Financial Advisors, a firm with a specific focus on agricultural commodities.

In an interview with Minyanville, Hackett explained that, “You don’t see such substantial premiums in cash bids like this every day. You also don’t see a stock get bid up well above that substantial premium very often, either.”

Hackett says it “points to the fact that the agriculture sector is grossly undervalued compared to everything else” and “further clarifies the big investment opportunity in ag commodities -- especially in fertilizer -- without which, nothing grows.”

However, Hackett isn’t a buyer of Potash or any other of the big, household names right now.

“All fertilizer companies will be affected,” he says. “Everyone’s going to be looking at the classic names; there’s no story there. The big story is in looking for those smaller, lesser-known companies that will have tremendous upside opportunity coming off of this news.”

One of the stocks Hackett believes is poised for a big gain is Stonegate Agricom (ST.TO), which is 55% owned by Sprott Resources (SCP.TO). (Both are traded on the Toronto Stock Exchange.)

He says:

Stonegate trades on its own, but I think the way to play it is by buying Sprott. They are in the process of developing what appears will be largest phosphate mine in the world, in Peru, when it gets brought online in next one to two years. The main fertilizers in ag are nitrogen-based, potash-based, and phosphate-based. All of them are absolutely critical for high yields. The upside in a Stonegate would be quite substantial compared to a Potash. Stonegate has a market capitalization of $130 million; right now, it’s dramatically underpriced. With the valuations given to other companies like Potash, and given that Stonegate has a top-end phosphate mine, it wouldn’t be unthinkable that a few years from now, Stonegate could be worth a billion dollars. Like I said, the smart money will buy Stonegate through Sprott because, that way, you not only get Stonegate, you get all the extra good stuff Sprott has going -- oil, metals, and perhaps best of all, deals they set up two years ago with Indian nations in Canada to develop 250,000 acres of farmland, which is another fantastic asset that’s going to continue to do well -- and not a lot of companies have this sort of unique relationship in a stable country like that. Now, Stonegate could get bid up a bit today, but it’s really a fantastic investment at this point. Things like the Potash big tend to have more of a spillover in the larger stocks, and somewhat of a delayed reaction in the smaller names.

Hackett also likes “some of the Chinese names like China Agritech (CAGC) and China Green Agriculture (CGA).”

All three of these stocks -- Stonegate, China Agritech, and China Green -- may not catch as much of a bid immediately and are much more of a value compared to the big guys, according to Hackett.

“Look, before today’s big bid, Potash was at 24 times trailing earnings; now it’s close to 30 times trailing earnings,” he points out. “China Green is trading at 12 times trailing earnings. That’s a pretty big valuation discrepancy there. These lesser-known names have been left for dead, and that makes for a great investment that will likely see a big jump in the next six to 12 months. Everyone’s going to rattle off the classic names today, but there’s no 'there' there.”

Let others chase the momentum. The smart money is looking deeper.

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