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Bear of the Day: CF Industries (CF)

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CF Industries (CF - Free Report) assists in the transformation of natural gas into nitrogen products. The company manufactures and sells hydrogen and nitrogen products for fertilizer, energy, emissions abatement, and other industrial activities. CF Industries is a manufacturer and distributor of nitrogen fertilizer around the world. Its principal products include anhydrous ammonia, granular urea, and ammonium nitrate. CF Industries was founded in 1946 and is headquartered in Deerfield, IL.

The Zacks Rundown

CF Industries, a Zacks Rank #5 (Strong Sell), is a component of the Zacks Fertilizers industry group, which currently ranks in the bottom 14% out of approximately 250 Zacks Ranked Industries. As such, we expect this industry group as a whole to underperform the market over the next 3 to 6 months – just as it has year-to-date.

Also note the unfavorable earnings outlook for this industry below:

Zacks Investment Research

Zacks Investment Research
Image Source: Zacks Investment Research

Candidates in the bottom tiers of industries can often be solid potential short candidates. While individual stocks have the ability to outperform even when included in a poor-performing industry group, the inclusion in a weaker group serves as a headwind for any potential rallies and the journey forward is that much more difficult.

Along with many other fertilizer stocks, CF experienced a climax top in August of last year and has been in a price downtrend ever since. The share price is hitting a series of lower lows and represents a compelling short opportunity as the market remains volatile.

Recent Earnings Misses & Deteriorating Outlook

CF has fallen short of earnings estimates in three of the past seven quarters. Back in November of last year, the company reported Q3 earnings of $2.55/share, missing the $3.19/share Zacks Consensus estimate by -20.06%.

CF Industries has posted an average earnings miss of -3.15% over the last four quarters. Consistently falling short of earnings estimates is a recipe for underperformance, and CF is no exception.

The fertilizer company has been on the receiving end of negative earnings estimate revisions as of late. For the current fiscal year, analysts have decreased estimates by -27.53% in the past 60 days. The 2023 Zacks Consensus Estimate is now $9.95/share, reflecting negative growth of -42.75% relative to fiscal 2022.

Zacks Investment Research
Image Source: Zacks Investment Research

Falling earnings estimates are a huge red flag and need to be respected. Negative growth year-over-year is the type of trend that bears like to see.

Technical Outlook

As illustrated below, CF is in a sustained downtrend. Notice how the stock has plunged below both the 50-day (blue line) and 200-day moving averages (red line). The stock is making a series of lower lows, with no respite from the selling in sight. Also note how both moving averages are sloping down – another good sign for the bears.

Image Source: StockCharts

While not the most accurate indicator, CF has also experienced what is known as a ‘death cross’, wherein the stock’s 50-day moving average crosses below its 200-day moving average. CF would have to make a serious move to the upside and show increasing earnings estimate revisions to warrant taking any long positions in the stock. The stock has fallen nearly -28% in the past year alone. 

Final Thoughts

A deteriorating fundamental and technical backdrop show that this stock is not set to make new highs anytime soon. The fact that CF is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.

Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of CF until the situation shows major signs of improvement.

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