Chart Sets Up Just Right for CF Industries

Recommending the purchase of agriculture stocks isn't a new idea. These stocks have been in a strong rally phase for quite some time now. The themes of increased worldwide demand remain intact and continue to support the prices of all grains. While the ethanol subsidies in the U.S. are being debated, the demand for corn remains high. One thing it takes to grow crops is fertilizer, and as demand for grains increases, so does the demand for fertilizer. By all accounts, this demand remains strong and continues to increase.

According to the Agriculture Department, U.S farmers are expected to plant 86 million acres of corn, which is down from last year's peak of 93.6 million. However, they will still need to fill their fields with other crops that demand nitrogen, such as wheat. Agribusinesses, such as CF Industries (CF - commentary - Cramer's Take), have become bulls among what has been primarily a bearish market environment.

CF Industries is an agriculture company that makes and distributes fertilizer. There is also a high global demand for phosphate fertilizers, but supplies are low. The price for phosphate rock has gone up, causing the prices for phosphate fertilizers to go through the roof. However, CF has been able to keep their costs down since they hold their own phosphate mine in Florida.

As global populations grow, demand for grain stocks rise. There is also a rising demand for meat due to rising wealth, which also requires grains for feed. Considering all these factors, food prices are forced to go up, encouraging farmers to plant more, and use more fertilizer. This causes a high demand for the nitrogen and phosphate fertilizers that CF produces.

It has now branched out overseas and markets fertilizers in 65 nations. Across the North American corn belt, CF owns 26% of the nitrogen market and 19% of the phosphate market. In general long-term prospects for CF Industries remain strong.

CF Industries

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This stock has had a significant rally in recent weeks, and over the last few years, benefitting from the worldwide economic growth. The stock performance is reflective of the very strong underlying fundamental backdrop. There is always the risk the stock has priced in the best-case scenario, but CF and other fertilizer companies have continued to beta even the most optimistic estimates driving the stock price higher.

The recent price action has been what we refer to as a bullish consolidation. This is a period of profit-taking typically occurring in light volume after a strong push forward. This enables the stock to pause and re-establish upside momentum.

Pullbacks in uptrends are also typically buying opportunities, and with CF pulling back to support in the$120-$130 range, a buying opportunity is currently present. We would expect the stock to have a move back to the previous highs in the upper $150s. A break below $120 would suggest the pullback is increasing in momentum, and we would stop long positions below that level.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.