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Potash: Trade If You Dare

Potash's rejected offer from BHP Billiton of $130 a share will only add to the trading volatility in the stock.

You couldn't find a better proxy for the commodity markets in any stock than with the often quoted

Potash of Saskatchewan


, and Tuesday's rejected unsolicited offer for the company at $130 a share will only add to the trading volatility. Put this one at the top of my "trade if you dare" list, as its stock movement is rarely predictable, always extreme and offers prospects of either terrific gains or losses at any moment.


latest offer from BHP Billiton (BHP) - Get BHP Group Limited American Depositary Shares (Each representing two) Report

at an astounding $38.5 billion only adds to the crazy story and unfathomable market action. The initial offer, a full 16% above the last closing price for Potash Monday, was rejected by the company (of course) as "grossly inadequate," but despite the rejection of the offer, the shares took off and are now trading at a sizable premium to the proposed, but rejected, bid.

The greed factor that comes with buyout attempts certainly makes for fantastic speculative activity and great trading, particularly in a stock directly correlated to commodity action -- an already volatile group. Trading it is fun, but don't look for much logic or a fundamental story to hang your hat on while you're doing it. This is a share price that reached a lofty $180 in October 2008, only to trade under $50 a share three months later.

The revolving door of unrestrained interest in shares when everyone seems to have to have it is followed just as quickly by panic about economic slowdowns and double-dips that send this supplier of fertilizer reeling. From March 2010 year until July, shares plummeted from $127 to under $85. Since then, however, the rally has been just as compelling, culminating in Tuesday's $25-plus breakout based upon this unsolicited bid.

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But didn't these guys just say no? I'm not sure they would get the same answer if they went to their shareholders or not, but Tuesday's offered premium seemed like an excellent buyout offer to me. In refusing to even consider it, the management of Potash has certainly signaled to shareholders how much they like the value contained in Monday's share price.

Don't believe it. My trader's instinct says that Tuesday's $140 share price is way overdone. This stock has a history of overshooting in both directions, so I would expect it to continue moving up for a day or so - but the other side of the mountain has already proven itself to have a steep and treacherous slope.

My bet is it's going to start a predictable slide down that mountain again real soon. If I held shares in this issue, I'd take this buyout offer as a great opportunity to take some very significant profits.

Of course, if I was trading it, I'd probably still be buying -- momentum trades, if you can keep them in close check, are terrific day trade vehicles.

Either way, if you're playing this stock, you're in for a bumpy ride -- wheee!

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks.

Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years.

Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals.

Dan obtained a bachelor of arts degree from the State University of New York at Stony Brook in 1982.