CF Industries stock leaves competitors in the dust

When you choose the right stocks for your portfolio, you can follow market price movements or evaluate a stock’s current valuation compared to competitors in the same industry. But how to choose the right one among all sectors?

You can shamelessly copy what the big players do. Names like The Goldman Sachs Group NYSE:GS they have been in business for over a century, deriving increasing profits from their business activities.

How do these traders choose where to place their bets? Typically, we start with a process called “top-down” analysis.

Now that the Federal Reserve (the Fed) will cut interest rates by the second half of 2024, markets are preparing to undertake a move of money to take advantage of the changes that the new policy will bring. For some reasons, the chemical fertilizer industry may soon become one of the hottest. CF Industries NYSE:CF It quickly becomes a suspect price for this new breakout.

Focus on what matters

To land in the best sector and put the odds in your favor, you need to get there before the rest of the market realizes where the party is. As for the manufacturing sector, which includes industry names like chemicals and fertilizers, the party hasn’t started yet, but it’s starting.

Understanding why these sectors might be the place to look is easier said than done. However, you can start by following the trends in the ISM Manufacturing PMI reports. In the last quarter, the chemical and agricultural sectors showed signs of contraction until bursting into explosive expansion last month.

The story doesn’t end there as Goldman Sachs analysts expect a turnaround in the broader manufacturing sector of the US economy; you can rest assured that big money is waiting on the sidelines to get into the best stocks. You can read more about their opinion in this 2024 macro outlook report.

When the Fed lowers interest rates, the strength of the dollar (which follows the level of interest rates) may also decline. A weaker dollar could make American exports (like crops) more attractive to foreign nations, and that’s where CF Industries comes in.

According to the third quarter 2023 earnings presentation, The Mosaic Company NYSE:MOS reports that the current inventory-to-use ratio, a measure of where supply and demand trends are in the agricultural sector, is at a cyclical low. In other words, there is too much inventory and not enough demand.

Now, this can pose a significant drag on the profitability of these companies. However, as you now know, the cycle could reverse quickly, especially now that the big guys are expressing their interest in a breakout of the sector. Consider watching now, as the industry can potentially continue to expand thanks to its newfound expansion.

Why CF?

What might make you land on CF stock rather than other names? Remember the two factors of price action and market pricing above? Here’s what they say about CF.

While competitors like Mosaic e Scott’s Miracle-Gro Company New York Stock Exchange: SMG trading at 52% and 63% of their 52-week highs, CF stock traded at an industry-leading 86% of its 52-week high price. There must be a reason why the markets are willing to push the price up like this.

Shares of Scotts Miracle-Gro rose about four points when they announced their quarterly earnings a couple of weeks ago; this is an increase of approximately 7.4%. Since this company supplies similar chemicals and fertilizers to CF, its earnings may also foreshadow what may await CF shareholders in their next earnings announcement.

While analysts believe both Mosaic and CF will see earnings per share contractions of 13.5% and 18.7%, respectively, markets are starting to bet that these projections could rise to reflect the growth to come. At least, that’s the case with the CF.

The Chemicals and Fertilizers industry trades at an average forward P/E of 10.6x and an average P/B ratio of 1.0x. Mosaic brings a slight discount to both of these measures, a 3% P/E and a 16% P/B. Remember the saying, “It has to be cheap for a reason,” your wallet shouldn’t be left looking for the reason.

CF stock requires a premium valuation on these measures to differ from Mosaic. A forward P/E of 13.5x represents a 28% premium to the industry, its P/B of 1.8x a massive 78% premium, and the opposite adage, “It has to be expensive for a reason,” applies Also here.

This reason may vary with future crop demands. However, knowing what you know now, it’s easier to expect a decent rally for this stock, considering it’s in line with the history of a breakout in the sector.

Before you consider Goldman Sachs Group, you’ll want to hear this.

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