The Burst Commodity Bubble

Do you remember the food and commodity bubble? Sure you do. It wasn't that long ago. The rise of India and China was inexorable, and the supply of food in general and meat in particular was never going to keep up with demand. As a result, a formerly-sleepy outfit known as Potash Corporation of Saskatchewan did a Nortel and briefly became the most valuable company in Canada.

Not any more.

In three-and-a-half months, the company has gone from the most valuable in Canada - worth $77-billion at its apex - to losing its place in the top 10, standing at [Thursday's] close at No. 11, worth $31-billion.

Since then, POT has fallen further still, from $93.51 to $86.86, although it does look as though the carnage has slowed down a little. Meanwhile, its fellow fertilizer company Mosaic is now trading below $34 a share, down from a high of $163 in June.

Now that's what I call a bursting bubble. But the poor in India and China are still becoming middle class, there's still enormous demand for fertilizer -- and the actual price of fertilizer is still, for the time being, high. As a result, John Burbank of Passport Capital made a strong case for MOS at the Value Investing Congress yesterday: what used to be a momentum stock has, in the space of a single quarter, become a deep-value stock. After all, it's not like these are dot-coms without earnings: all of these companies are enormously profitable.

If it's true, as analyst Terence Ortslan is quoted saying, that "nothing has changed fundamentally," then now could be a great time to buy all those commodity stocks which looked ridiculously overpriced a few months ago even though the long-term fundamentals seemed compelling. Vale, for instance, closed at $12.48 a share today, down a whopping 14% on the day and down 72% from its May high.

Of course, percentage-off-highs is a really, really stupid basis on which to buy anything. Stocks should be valued based on their future earnings, not on their past stock prices. But if you're really looking for bargains these days, I suspect you're much more likely to find them in the wreckage of the commodity stocks than you are in the financials.

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