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When 284% Gains Aren't Enough

By Toby Shute – Updated Apr 5, 2017 at 8:38PM

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Mosaic's earnings exploded, yet the stock got slaughtered.

Never in all my investing days have I witnessed a stock sell off so hard on a 284% per-share earnings pop.

Then again, Mosaic (NYSE:MOS) did report a 12-fold earnings gain back in April, so I guess 284% is pretty puny.

Of course, we investors are a forward-looking bunch (on our best days, anyway), and future results count most to us. Mosaic's management must have said some seriously shocking stuff about its outlook to invite a 41% haircut yesterday, right?

Are there liquidity concerns here, such as those hammering General Growth Properties (NYSE:GGP) this week? Some bad currency bets, like the one that stung Sadia (NYSE:SDA)? Not at all. Mosaic is sitting on a net cash position, and its manageable debt load is being speedily whittled down. There's nothing wacky going on with currency derivatives.

The worst thing I heard yesterday is that the phosphate pipeline is better-supplied than it has been for some time. Specifically, U.S. producer stocks were recently 8% above their three-year average. Ooh, spooky!

Now, phosphate is an important thing to focus on, because Mosaic derived twice as much operating income from phosphates as from potash this quarter. The supply-and-demand balance for these fertilizers is different, which is why I personally prefer PotashCorp (NYSE:POT). Phosphate inventories have fattened up. So is Mosaic facing a massacre?

No. Just as Chesapeake Energy (NYSE:CHK) is tightening the reins in the natural gas sphere, Mosaic is cutting its phosphate production. This is a far more concentrated market than that of natural gas production, and I expect the move to provide meaningful support to prices within months.

Management pointed to past precedent in this regard. In 2006, there was a similar situation with potash inventories. Miners scaled back. Fast-forward to today, and supply is seriously stretched.

The sell-off yesterday was fierce, but to this Fool, the fundamentals didn't suggest there was anything to fear.

Related Foolishness:

Chesapeake is an Inside Value selection. Sadia is a Motley Fool Hidden Gems pick. Fertilize your portfolio's growth potential with any of our Foolish newsletter services free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Mosaic Company Stock Quote
The Mosaic Company
MOS
$48.53 (-7.60%) $-3.99
Nutrien Stock Quote
Nutrien
POT
Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
CHKA.Q
Brookfield Property REIT Inc. Stock Quote
Brookfield Property REIT Inc.
GGP
Sadia S.A. Stock Quote
Sadia S.A.
SDA.DL

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