Even after missing net income expectations and posting a net loss of $162 million in the past quarter, shares of Mosaic Co. (NYSE: MOS) still warrant a double-digit upside from where they trade today. At least, that is what Wall Street analysts currently expect, as stock valuations are often forward-looking and not wholly based on the present data.

In the case of Mosaic, the agricultural industry’s cycle is working in favor of increased demand for phosphate and other fertilizer products for reasons that will become clear to investors in just a bit. Compared to other pees in the basic materials sector, names like C.F. Industries Holdings Inc. (NYSE: CF) and Scotts Miracle-Gro Co. (NYSE: SMG), it is Mosaic stock that still offers investors the most discount on a valuation and price action basis.

Despite bearish sentiment in its financial results and recent price action, Mosaic is still well-positioned to outperform the industry and the market. This thesis will remain true as long as investors stick to the fundamentals surrounding this company. But before digging into the intricacies of the agricultural space, here is how Mosaic did over the past quarter.

Hidden Opportunities: The Positive Signs in Mosaic Stock You Don’t Want to Miss

Sure, the company reported a net loss for the quarter, which is enough of a reason for it to trade at only 67% of its 52-week high price. In comparison, Scotts Miracle-Gro stock trades at a leading 92% of its 52-week high, and C.F. Industries at a second-place rate of 86%.

However, investors need to examine this to justify today’s price targets on Mosaic stock. The lifeblood of any business is its free cash flow (operating cash flow minus capital expenditures), and Mosaic managed to have positive cash flow despite the net loss.

How can that be? Well, net income is often affected by non-core items or accounts that aren’t part of the main business operations. During the quarter, according to the earnings press release, Mosaic reported a net $268 million loss in foreign currency exchange rates.

Now, why would markets punish a fertilizer company for an unrelated loss in foreign currency exchanges? It seems unfair and potentially exploitable for true value investors. Some on Wall Street—those bold enough—decided to take this view.

Analysts at Barclays slapped—and kept—a price target of $39 a share for Mosaic stock, directly calling for up to 45.5% upside from where the stock trades today. Moreover, Mosaic stock’s short interest declined by 2.7% over the past month, further demonstrating bearish capitulation.

Institutional Investors Are Betting Big on Mosaic Stock's Promising Future

There has to be a reason why up to $1.3 billion of institutional capital made its way into Mosaic stock over the past 12 months and why those at American Century Companies (Mosaic's second-largest shareholder) decided to boost their stakes in the company by 13.2% as of August 2024.

The asset manager's net investment today is $13.1 million, and those in the know would have to point to where the crop cycle is currently in order to justify this recent buying aside from Wall Street bullishness.

According to the stocks-to-use ratio, a measure of how much food supply versus demand there currently is, the markets are coming off a cyclical high. What this means for companies like Mosaic is that food inventory will come into a tightening cycle, where demand will only keep increasing as populations grow and become wealthier in emerging markets.

It would make sense to see demand for Mosaic's fertilizers pick up in the following quarters, but why is Mosaic out of all the industry peers? Apart from paying a 3.1% annual dividend yield to shareholders, the answer lies in the discount the stock carries.

Compared to the agricultural chemicals industry's average valuation of 100.3x P/E, Mosaic stock's 11.4x offers a massive discount. Not only that, but it also falls below Scotts Miracle-Gro's 29.6x and below C.F. Industries' 14.6x. There is a big gap, both in food supply and in price, to be filled, and Mosaic stock seems one of the best potential candidates to get the job done.

Source MarketBeat