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CF Out, PNRA In

August 9th, 2014

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This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.

Dear Premium Members,

Today, I've decided to remove CF Industries from the premium portfolios, and introduce Panera Bread in its stead.

CF Out

CF Industries has had a good run. Since June 2013 when I first introduced CF into the premium portfolios, CF outperformed the overall U.S. market by around 15%.

CF had came to my attention for a few reasons.

Firstly, it was a well run company. Compared to their peers, CF recorded consistently higher margins and a track record of deploying capital efficiently.

Secondly, it was cheap. Although the company had recorded enormous profits in recent years, most analysts knew it wouldn't last. To make fertilizer, companies like CF consume a lot of natural gas. Thus when natural gas prices plunged the way it did, their profit margins expanded far above historical levels.

In order to take advantage of the new found opportunity, fertilizer companies invested in more manufacturing capacity. Once the new capacities came online, everyone assumed that profit levels would fall back to normal levels, or perhaps even lower.

Few people in Wall Street want to hold a company whose profit margins are about to fall, so many of them either sold or held back from investing in the company. Thus, CF's price became cheap, even when you accounted for the inevitable fall in profit levels.

And lastly, as an icing on the cake, CF provided a natural hedge against other positions in the premium portfolio - namely, the oil and gas producers LRE.TO and PMT.TO.

Whenever natural gas prices went up, LRE.TO and PMT.TO benefited, and CF suffered. Whenever natural gas prices went down, the opposite happened.

During the last year or so when CF was in the portfolio, natural gas prices neither crashed nor spiked up heavily. As a result, we have seen all CF, PMT.TO and LRE.TO beat the market so far.

However, whereas I still feel good about PMT.TO and LRE.TO, natural gas prices have sufficiently risen to the point where CF, combined with its rise in stock prices, don't look as attractive anymore. This is why I've made the decision to remove CF from the premium portfolios.

PNRA In

I often read up other people's view on Seeking Alpha, but not for the reason you think. Generally, I find the analysis there superficial and full of mathematical errors. Instead, I generally go there to gauge investor sentiment and to see why some people are betting against a stock. Opportunity arises when people bet against a stock for the wrong reasons.

However, once in a blue moon, I come across a very thorough and detailed analysis, and I found one such article for PNRA. So instead of having me explain why I think PNRA is a great stock, I'll just defer to the article on this occasion.

http://seekingalpha.com/article/2350525-panera-bread-the-darkest-hour-is-just-before-the-dawn

Of course, I've done my own due diligence and arrived at my own conclusions, which just happen to agree with the author of the above article.

This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.