You don't often find astock with a 7.7%dividend yield in this
income starved environment. When it's supported by abullish
technical outlook and solid fundamentals, you know it's likely a
Rentech Nitrogen Partners (NYSE:
are on a tear. So far in 2013, the stock is up more than 15%, and,
as I explain below, the technicals point to further
The master-limitedpartnership (
), which went public in 2011, makes nitrogen fertilizer and
industrial chemicals. With a rising global population, and a
decrease in arable land, their fertilizer is in high demand.
Rentech operates two nitrogen fertilizer plants: one in
Illinois, the other in Texas. The Illinois property is located in
the heart of the Midwest Corn Belt -- the largest consuming area of
nitrogen fertilizers in the United States.
This past November, Rentech acquired a Texas-based ammonium
sulfate fertilizer plant, previously owned by Agrifos. It's
expected that the $158 millionacquisition will help Rentech
generate $20 million in additionaloperating income and $25 million
inEBITDA in 2013. As an MLP, Rentech must pay out 90% of
itsearnings , so the majority of thecash flow increase should pass
straight into shareholders hands as dividends. The rising dividends
should support the share price.
Rentech is also currently benefiting from favorable weather
conditions. Last year's drought in the United States reduced corn
inventories, causing farmers to purchase more fertilizer to grow
crops. Additionally, last year's unseasonably mild winter meant
lower natural gas prices. Natural gas is a key component of
nitrogen production, used to make fertilizer. So long as the price
of natural gas remains low, Rentech, and shareholders of the
company, should continue to benefit.
From a technical perspective, the stock is strong. Shares have
been in amajor uptrend since their December 2011 low of $16.04.
Since this time, the stock has headed due north.
In September 2012, the stock hit a high of $40.05. Unable to
break through round number resistance at $40, shares slipped to a
low of $34.75. This pattern repeated again in October as the stock
hit a fresh high of $41.15, only to slide back to support, at
Rising off support in late November, shares once again tested
resistance near the $40 level. Unable to break this barrier yet
again, shares slid, approaching, but not quite falling to $34
support. This volatile up-and-down pattern created a rectangle.
This Jan. 7 trading week, shares blasted through $40 resistance,
hitting an all-time high around $46.88. In the process, the
multi-month rectangular holding pattern was bullishly broken.
According to themeasuring principle for a rectangle --
calculated by adding the height of the pattern to the breakout
level -- shares could hit aprice target of $47.80 ($41.15-$34.50 =
$6.65; $6.65+$41.15 = $47.80). At current levels, this target
represents about 4.25% returns. However, with nooverhead resistance
in sight, the stock could go higher.
The bullish technical outlook is supported by strong
fundamentals. Due to strong sales of nitrogen fertilizer, the
company's third-quarterrevenue jumped 56% to $60.2 million, from
$38.6 million in the comparable year-ago period. It should be noted
that reduced supply available for shipment negatively impacted 2011
For the full 2012 year, to be reported March 18, analysts
project continued demand for nitrogen fertilizer will cause revenue
to increase 27%, to $228.8 million, from $179.9 million last
For the three months ending Sept. 30, 2012, operating income
nearly tripled to $29.2 million, from $10.4 million in the
comparable year-ago period. Higher margins and prices paid for the
company's nitrogen products largely contributed to the gain.
Reduced R&D expenses also helped boost income levels.
Likewise, third-quarternet income increased almost nine-fold to
$28.8 million, from $3.3 million in the comparable quarter a year
ago. On a per sharebasis , these results break down to earnings per
share of two cents, compared to an earnings loss of -26 cents per
share in the year-ago period.
For the full 2012 year, analysts project continued low natural
gas prices, combined with income generated from the recent Agrifos
acquisition, will cause earnings to rise 362% to $3, from 65 cents
In addition to a strong fundamental outlook, the company's
forward annualdividend is $3.40, which translates to an
impressiveyield of about 7.7%.
All these factors make Rentech a winning stock. Even if
resistance is hit near current levels, you get paid handsomely to
Risks to consider:
Natural gas is an essential component in nitrogen production.
So long as natural gas prices remain low, production costs can be
kept down. Rising natural gas prices could negatively impact future
earnings. However, record production, combined with unseasonably
warm weather so far this year has meant low natural gas prices that
should continue well into the foreseeable future. Because the stock
recently spiked, traders might want to enter the position with
caution, so as not to buy at a high. The safest strategy is to wait
for a pullback before buying.
Action to Take -->
Buy RNF on a pullback to $43.05. Set stop-loss at $40.02, slightly
below current support. Set initial price target at $47.80 for a
potential 11% gain.
This article originally appeared on ProfitableTrading.com:
High-Yielding Stock's Chart is Projecting
-- Dr. Melvin Pasternak
Melvin Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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