Mosaic, Potash vs ETFs as Proxies

Mosaic's stock price highlights the danger of using individual companies as proxies for sectors.
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) -- A recent Barron's article about U.S. fertilizer company


(MOS) - Get Report

said demand for potash and other fertilizers should strengthen as the global economy recovers and that a deal calling for Mosaic to sell potash to Canada's

Potash Corp. of Saskatchewan


"for little more than cost" will be expiring soon.

As a result, Mosaic's earnings may jump, presumably meaning a higher price for the stock.

The story for agriculture stocks and commodities is that diets are improving in emerging-market countries, creating a wealthier middle class that can afford meat. (Fertilizer is used for crops that nourish animals.) Several exchange traded funds are capitalizing on that trend. The most popular ETF in this space is the

Market Vectors Agriculture ETF

(MOO) - Get Report

, which is heavy in stocks such as Mosaic and Potash Corp.

The Barron's article, however, contained a comment from an investment manager that shows a profound lack of understanding of risk that, unfortunately, is all too commonplace. The manager, James Puplava of PFS Group in San Diego, said: "I view it (Mosaic) as a safe way to play emerging markets."

That type of thinking is evidence of home bias. Investors are more comfortable buying stocks from their own country or region, or funds that invest their home country.

Mosaic is a fine company with a good track record of being a reliable proxy for whatever is happening with agriculture stocks. But the notion of Mosaic being a safe way to play emerging markets isn't supported by the price movement of the stock. Mosaic peaked in July 2008 at $145 and then fell all the way down to $22, a drop of 84%. The

iShares Emerging Markets ETF

(EEM) - Get Report

in that same period declined 57%. China was hit as hard as any emerging market, and its index was down 70% at its low-water mark.

That doesn't necessarily make Mosaic a bad stock. It's clearly been a good source of volatility. Hurting the "Mosaic as emerging-market proxy" case in the short term might be the fact that the stock has badly lagged behind iShares Emerging Markets ETF since the stock-market low in March. Perhaps the expiration of the unfavorable contract with Potash Corp. can lift the lid off the stock. Concluding that Mosaic is a safe way to play emerging markets is to believe that the volatility characteristics of the stock will be different than what it has been in the past, but there's no support for that.

At the time of publication, Roger Nusbaum had no positions in the securities mentioned.

Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;

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