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Potash (NYSE: POT) is among the world’s leading producers of agricultural fertilizers. Unfortunately the company stood out during my nightly scans for being on the bearish list.
POT has been mired in a long-term downtrend for over three years now and at present it is bumping up against the trendline that connects the highs from the past three years. It is hitting this resistance at a time when the stock is entering overbought territory based on the weekly slow stochastic readings.
Looking at the chart above, each time the slow stochastic readings have moved above the 80 level over the past two and half years, the stock has experienced a decline of at least 10%. I have marked the instances of overbought readings with blue circles and the corresponding stock peak with a red arrow. I look for the pattern to continue and for the stock to drop at least 10% within the next three months.
The resistance and overbought status could be the least of POT’s problems as the fundamentals for the company explain much of why the stock has been mired in the decline. I have always felt that the fundamentals tell you what to buy or sell and that the technical indicators tell you WHEN to sell. That certainly looks to be the case with POT.
Looking at the last three quarters of EPS reports, the average EPS growth rate for POT has been -37%. The three year EPS growth rate is -4%. The sales percentage change for last quarter was -6% and the sales growth rate for the last three years is only 1%. These are not the numbers of a stock that is set to soar.
Potash is scheduled to release earnings on April 21, so you will want to keep that in mind should you choose to trade the stock. The stock fell over 10% in the two weeks ahead of the last earnings report and the previous report to that is where the stock dropped so sharply in July of last year. You can see the large decline on the chart above.
Earnings are tricky most of the time because it isn’t necessarily how the company does against estimates, it is how investors react afterwards that matters. The sentiment toward POT is relatively bearish at this point, but given the technical performance and the ugly fundamentals, the bearish sentiment is warranted.
Here is how I would look to play Potash at this time. I would short the stock with an 8% trailing stop. I would set a target at the $27.50 level at the very least. Should the stock fall in the next 19 days as I think it will, I would take some profit off the table ahead of the earnings report. This will give you the chance to take in a nice gain and protect against an upside surprise from the earnings. But it still gives you the chance to benefit from another disappointment like the one that occurred last summer when the stock dropped 22% in one week.
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