CF Industries is Monday's IBD Stock Of The Day as fertilizer and agricultural markets face an unprecedented supply crunch amid Russia's invasion of Ukraine. CF stock rose for the 10th-straight session, clearing a level at which investors should begin locking in at least some profits.
The flagship IBD 50 portfolio includes CF stock. The stock's run up triggered its exit from IBD's Leaderboard lineup.
The Deerfield, Ill., company produces nitrogen-based fertilizer, especially important in growing corn. Amid high corn prices, lean inventories and risk of disrupted supplies, demand for nitrogen-based fertilizer is very strong.
Meanwhile, an already-tight supply picture has worsened with Russia's assault on Ukraine. Russia accounts for about 14% of total global exports of nitrogen-based fertilizer. On Friday, Russia's trade and industry ministry recommended a ban on fertilizer exports. Even before Russia's invasion, the high price of natural gas — the principal raw material — had forced some European fertilizer producers to shut down operations, the market's first signs of capacity elimination.
Then, last week, the price of natural gas in Europe spiked above $60 per million BTUs, then kept rising. That contrasts to about $5 in the U.S., where most of CF's production is located. Marginal fertilizer producers in Europe need a much-higher selling price for their product in order to keep operating.
High Corn Prices Here To Stay
Corn prices are typically the main determinant of nitrogen fertilizer price. High corn price signal strong fertilizer sales.
But if the price of nitrogen fertilizer gets too high, cutting too deeply into farmers' profitability, they'll cut back on purchases until the price recedes, Piper Sandler analyst Charles Neivert told IBD. That could involve growing less corn, perhaps shifting some acreage to another crop. But with corn prices currently at their highest level in a decade — around $8 a bushel of corn, sparked by the Russia crisis — farmers can afford to pay more.
On Monday, Neivert hiked CF stock's price target to 120 from 88, keeping an overweight rating. His main thesis isn't tied to Russia-Ukraine. Even after the conflict recedes, Neivert expects a new higher norm for corn prices, nearing $5 per bushel.
Despite a rare streak of five great crop years, global food insecurity is rising he said. "We're running like hell just to stay in place."
But the inevitability of weaker crop yields and scarce inventories suggests higher corn prices are here to stay, he says.
Still, CF stock's rally is at least to some extent attributable to the fast that it is "a hedge" against a worsening Russia-Ukraine conflict, Neivert said.
CF Stock Analysis
CF stock raced up as much as 10% in early Monday stock market action, before settling for a 4.2% rise to 95.12 in afternoon trade.
At Monday's peak, CF stock had rocketed 37% over the course of a 10-session rally. Just under half of the 27.25-point gain came on Friday and Monday.
Despite the strong fundamental backdrop, the chart is flashing some early signs of a potential blow-off rally.
It may not turn out to be one. However, CF stock's chart is signaling investors that it's a good time to lock in at least some profits.
CF stock broke out on Oct. 1, surging 9.5% to clear a 57.29 buy point from a cup base. CF stock has advanced more than 60% since that breakout, and 42% since the start of the year.
Since that breakout, CF stock has etched a pattern of three ascending peaks. A line drawn across those peaks marks an upper channel.
The latest advance has seen CF stock punch above that channel line, which marks a good time for investors to reducing their position and sell into strength.
Some other features of the current run — 10 straight advances on high volume and a possible blow-off rally the past two sessions — also support the case for selling into strength.
