Tuesday, 8 March 2016

Potash (POT) A classic Value Trap

For any investor a bear market is tough. Nobody likes logging into their trading account and seeing it awash in red. Even worse is a bear market accompanied by a dividend cut.  So when Pot started dropping on fears of a dividend cut I had to make a decision on whether I was going to sell or not. So avoid making an emotional decision I looked at the fundamentals to see if anything had changed and secondly calculated what my ROI would be 2-3 years out.
On both accounts the numbers said screamed sell.

  • Potash is a commodity there is very little management can do to increase earnings until the price recovers.
  • Until that happens earnings along with the stock price and the dividend will stay mostly flat.
  • It will take roughly 13 years to make up for the loss (assuming the yield remains at 5%)

Potash is what you call a  classic value trap. You buy hoping beyond hope that it will one day recover. But as I wrote in my forth coming Canadian MoneySaver article, Hope is not a Strategy. Based on this analysis I sold at 22 a share. And Yes I took a substantial loss. I'll detail the lessons learned here in a later blog post.  

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