Mosaic (MOS) has been on a magnificent run. Shares have skyrocketed over 43% year-to-date.
While investors ought to be careful chasing any such high-momentum stock after a sudden parabolic move, it’s noteworthy that MOS stock still sports a multiple that’s indicative of a value play.
Mosaic has become cheaper as its stock has risen, thanks to the significant tailwind facing the agricultural commodities space. Such industry strength can reverse on a dime, though. That’s why price-to-earnings (P/E) multiples in names like Mosaic don’t tell the full story, given how difficult it is to forecast a commodity’s next move.
Though I prefer buying commodity plays when the momentum is riding in their favor, there’s a fine line between chasing such plays and making a prudent value investment on strength.
For now, I am bearish on the stock, as I don’t think the modest 13.4 times is indicative of deep value.
Mosaic Stock: Cheap, but Overvalued?
It seems like an oxymoron to refer to a stock as both “cheap” and overvalued. Such a peculiar proposition looks like the case with Mosaic stock after its phenomenal run. The phosphate and potash producer has benefited from the Ukraine-Russia crisis, which sent fertilizer prices surging in recent weeks.
With agricultural commodities at or around new highs, one has to be aware of the potential impact of a blow-off top in such commodities. A peaceful resolution to the crisis that sees a removal of sanctions against Russia could send fertilizer prices back towards normalized levels.
As the second-largest fertilizer exporter, sanctions and export bans have had a similar shock on agro commodities as oil. One has to view the shocking spike as unsustainable over the medium term.
Potential Pullback Could Prove Painful
A significant pullback in fertilizer prices could act as a major drag on the Mosaic’s profitability, and the valuation will reflect accordingly.
Not to take away from Mosaic’s management. It has done a spectacular job of lowering potash production costs, making it more challenging for up-and-coming miners to compete.
Still, such operational talents will not help the stock once the industry tides turn against it. A more structured cyclical downturn in agricultural commodities could prove devastating to the stock.
Wall Street’s Take
According to TipRanks’ consensus rating, MOS stock comes in as a Moderate Buy. Out of 14 analyst ratings, there are seven Buy recommendations and seven Hold recommendations.
The average Mosaic price target is $60.38, implying 0.6% downside. Analyst price targets range from a low of $49 per share to a high of $83 per share.
Bottom Line on Mosaic Stock
Mosaic is a top-tier fertilizer producer and the stock seems cheap based on trailing earnings and sales. That said, one has to weigh how the multiple could shift should a substantial fall in commodity prices be in the cards in the second half.
Though such well-run commodity producers are excellent portfolio diversifiers, I’d much rather wait for a pullback. I think the easy money has already been made, and a large amount of pain could hit those who chase it without a game plan.
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