MOS – A Contrarian View

The Mosaic Company (MOS) has garnered an over-the-top outpouring of affection from the analyst community in recent weeks. On Monday, May 23, the stock scored upgrades from J.P. Morgan and Stifel Nicolaus (to "overweight" and "buy," respectively), and Credit Suisse followed suit the next day by reinstating coverage of MOS with an "outperform" recommendation.

Then, over the Memorial Day weekend, Barron’s weighed in with a bullish long-term outlook on MOS. That vote of confidence was reiterated by Citigroup on Tuesday, when the brokerage firm upgraded the stock to "buy" from "hold." Atlantic Equities was also swept up by MOS-mania, raising its rating to "neutral" from "overweight" on Wednesday.

This onslaught of upbeat analyst attention flies in the face of ongoing fundamental issues for MOS. Not only has severe weather across the U.S. dented the prospects for the farming season ahead, but Cargill recently spun off its majority stake — creating, as Barron’s admitted, "a glut of Mosaic shares" on the market. Apparently, quite a few bargain-hunting analysts believe that these fundamental woes have been priced into MOS already.

However, the steady stream of upgrades hasn’t done much to prop up the flagging share price. MOS is staring up at its formerly supportive 10-week and 20-week moving averages, which guided the shares higher from August 2010 through February 2011. After weeks of choppy price action, this trendline duo was definitively breached in mid-April, and went on to complete a bearish cross a short time later. Now, these moving averages have switched roles to act as resistance, and could thwart any near-term rally attempts by MOS. The equity has found an additional layer of resistance at its 200-day trendline, which has kept a lid on its progress since mid-May.

In fairness, MOS is approaching potential support at $65, which previously acted as a floor during the final months of 2010. However, with the stock still staring up at multiple layers of technical resistance, the rising optimism among analysts seems premature. 

Unlike the brokerage community, short sellers are rushing to capitalize on the stock’s slide. Until recently, this group had been more or less ignoring MOS. In fact, short interest hit a record low in March, down 52% from last year’s peak. However, short interest on MOS surged by 39% during the most recent reporting period, yet these bearish bets account for only a slim 2.5% of the equity’s float — suggesting there’s still plenty of room for more skeptics on the bandwagon.

Plus, data from the major options exchanges points to heavy buy-to-open call activity on MOS during the past couple of weeks, with substantial open interest accumulations located at out-of-the-money strikes in the June and July Expiration months. This call buying could be indicative of additional shorting activity by the bears, who may be using out-of-the-money options as hedges. Going forward, a continuation of this short-selling activity could create a headwind for the shares.

From a contrarian perspective, the stock’s momentum certainly seems to be favoring the shorts at the moment, as opposed to those bullish brokers. Many value-minded investors may be tempted to buy MOS while it’s "cheap," but it’s important to remember that cheap stocks can always get cheaper — and "inexpensive" is not synonymous with "a good value." Against the backdrop of lingering fundamental concerns, looming technical obstacles on the charts, and logic-defying optimism from analysts, it looks as though more downside may be in store for MOS during the near term.

Elizabeth Harrow

Schaeffer’s Investment Research