At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too.
With that in mind, we won't simply tell you what the analysts said; we'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's pundits and prognosticators.
Today's rating under review
According to the Food and Agriculture Organization, Planet Earth will add 2.3 billion people over the next four years. Combine more mouths to feed with greater wealth and an improving diet in developing nations like China and India, and demand for food could rise as much as 70% over the time period -- even as arable land grows little or not at all.
That may sound ideal for fertilizer producers -- but Citigroup thinks otherwise. Yesterday, it downgraded shares of the globe's foremost fertilizer producers, PotashCorp
Let's go to the tape
Finding the answer to this question isn't as easy as it once was. Long an "open rater," submitting its stock recommendations to Briefing.com for aggregation, perusal, and accountability, Citi closed the book on its ratings around last April. Today, small investors like you and I get only the occasional glance at what it's been up to, and our ability to keep close track of how the banker's more recent ratings perform is limited.
But before Citi shut off the lights, we developed a pretty good picture of its success rate in the agriculture industry. On average, Citi recommendations in the food products industry outperformed the S&P 500 about 68% of the time. Higher up the "food chain," its chemicals picks slipped a bit in accuracy, but the banker still managed to keep its record above 67% there. In each case, Citi did considerably better than the Street's average, which runs closer to 50-50.
Fertilizer stocks -- can you dig it?
Maybe I'm just being pessimistic here, but when I look at PotashCorp's and Mosaic's numbers, I tend to agree with the analyst's bearish bias. Selling for 27 times earnings, but expected by most analysts to grow these earnings at less than 15% per year over the next five year, PotashCorp shares do seem cheaper than those of rival CF Industries
Mosaic, selling for 18 times earnings, is cheaper than Agrium
Neither valuation looks attractive relative to its company's growth prospects, and now that BHP Billiton
Now, it's not all bad news, and I don't want to end today's column on a down note. So instead, let me highlight a fertilizer stock whose numbers look more favorable to new investors than those that Potash and Mosaic sport: CF Industries.
Unlike nearly any other fertilizer play, CF books more cash profits than the company is permitted to report as "net income" under GAAP. Over the past year, CF has generated more than $900 million in free cash flow, giving the company an attractive nine-times-FCF valuation. Growth, as I mentioned above, is unlikely to outpace those of CF's rivals. But when you pair Wall Street's projected 8.5% earnings growth at CF with the modest 0.3% dividend the stock yields, these shares at least seem fairly priced. I were shopping for a fertilizer stock, I'd look at CF.
Got a fertilizer fave of your own? Add it to your watchlist today. As a special bonus, we'll give you immediate access to a new special report, "Six Stocks to Watch from David and Tom Gardner."
Fool contributor Rich Smith does not own (nor is he short) shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 465 out of more than 170,000 members. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.