Flash Alert: That Time of Year, Again

Editor’s Notes: I’d like to extend an invitation to all The Energy Strategist readers to join me and my colleagues Roger Conrad and Neil George in New York next month for the Wealth Expo at the Jacob K. Javits Convention Center. The show runs from Oct. 19–21; I’ll be speaking on Saturday, Oct. 20, at 4:30 pm and will be happy to speak to any subscribers individually at our booth (#144).

Attending the show is absolutely complementary. You can sign up at http://www.wealthexpo.net/.

On Thursday morning, Oct. 10, 2007, at 10:35am, I will be appearing on Canada’s Business News Network to discuss the profit warnings from Chevron Corp and Valero Energy, among other topics. You can see my interview via the Internet on www.bnn.ca. The interview will also be archived on the Web site for one week.

Earnings season for stocks in The Energy Strategist coverage universe kicks off in earnest in the next three weeks. But a few companies I follow have either already reported earnings or have pre-announced and updated guidance. I wrote about Dresser-Rand and Nabors Industries in last week’s flash alert; here’s a rundown of the latest:

Biofuels field bet recommendation Mosaic (NYSE: MOS) reported quarterly earnings per share (EPS) of 69 cents against expectations for 58 cents. Revenues soared 55 percent for the obvious reasons: rapidly rising fertilizer prices.

As I discussed in the Sept. 19 issue of TES, Down on the Farm, the fertilizer markets remain ultra-tight right now. Mosaic stated in its call that inventories of phosphate remain at 15-year lows, while inventories of potash fertilizer are down 42 percent year-over-year. The tight supply/demand balance sent prices higher straight through the normally seasonally weak summer months.

Although I expected results to be strong, I remain concerned about the near-parabolic rallies we’ve witnessed in fertilizer stocks since I recommended them one year ago. Mosaic is now up 250 percent from my recommendation just more than a year ago, and fellow field bet holding Potash Corp (NYSE: POT) is up 237 percent. These stocks could continue higher on pure momentum alone but look vulnerable to the first whiff of bad news.

If you haven’t yet taken my advice to take profits in both stocks, do so now. Both Potash Corp and Mosaic are rated holds in the field bet, and I’m raising my recommended stops to 95 and 47.50, respectively, to lock in gains.

Fellow biofuels field bet play Monsanto (NYSE: MON) reported results slightly under expectations for the quarter and gave a slightly weaker-than-forecast outlook for 2008. Some news outlets have made a big deal about the company’s quarterly loss, but that’s ludicrous; analysts were expecting a loss of 17 cents per share for the quarter against the reported 18-cent loss. This is a totally normal seasonal pattern for Monsanto.

Longer term, I see nothing to change my bullish case for the stock, which I outlined in the Sept. 19 issue. Specifically, analysts may have just gotten slightly ahead of themselves with estimates after Monsanto raised guidance on Sept. 17.

But in the next two years, there’s plenty of room for the stock to grow as it brings new generations of genetically modified corn and soybeans to market. The stock has already recovered a good chunk of its early morning losses; use the weakness to buy Monsanto.

For the record, Monsanto is still up 92 percent since I added it to the field bet and 11 percent since last month’s update.

Valero Energy (NYSE: VLO) and Chevron Corp (NYSE: CVX) both warned on earnings Wednesday morning. The prime factor behind the warnings was a weakening in refining margins.

But what’s silly about the way this is being painted in the financial media is that weakening refining margins aren’t really surprising to anyone; the crack spread offers an obvious, daily look at what refining margins look like. For subscribers unfamiliar with the refining industry, check out the March 21 issue, Looking Refined.

I’ll offer a longer, more-detailed take on these stocks in an upcoming issue of TES. For now, suffice it to say that weakness in refining is already well-known and discounted in the stocks. Both Valero Energy and Chevron Corp remain buys.

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