Sep 28, 202010 min read

Compass Minerals International Inc. - A Sideways Story

By Mihir Gupta and Karan Pathak (University College London)

Stock Name: Compass Minerals International Inc.

Ticker: NYSE:CMP

Sector: Metals and Minings - Other Mined Minerals

Current Market Price: $57.60

Recommendation*: Hold

Target: $58.50 - $60

Duration: 3 - 4 days

Company Overview

Compass Minerals International is a leading provider of essential minerals responsible for assisting in naturally created obstructions. These range all the way from salts for winter roadway safety to other forms for industrial and agricultural purposes.
The company has three major segments that are a) Salt, b) Plant Nutrition - North America and c) Plant Nutrition - South America.
Their Salt segment produces MgCl and markets salts for various industrial, road deicing and agricultural purposes.
The Plant Nutrition - North America segment includes fertilizers and micronutrients, especially with the ambit of sulfate of potash.
The Plant Nutrition - South America segment primarily operates out of businesses centred around agricultural productivity and chemical solutions in Brazil.
As per the latest financial statements published by the company, their Q2 Revenues for FY 2020-21 stood at $256.1 Million with an EPS of $0.04. Subsequently, their Revenues for Q1 - FY 2020-21 were recorded to be $413.9 Million with an EPS of $0.80.
Kevin S. Crutchfield serves as the President, Chief Executive Officer and Director of the Company, James Standen as the Chief Financial Officer, George J. Schuller as the Chief Operations Officer and Angela Y. Jones serves as the Chief People Officer.

Product Offerings Snapshot

Compass Minerals International produces salt, plant nutrients and magnesium chloride primarily in North America. The company also has storage solutions and all of their products have a variety of applications in industrial, agricultural, commercial and consumer markets.

Salt: Compass Minerals is the leading salt producer in North America and the UK. Their largest business produces highway deicing products such as rock salt. Their salt is also utilized for water care, animal nutrition and culinary salt.

Plant Nutrients: There are four major product lines that lie under the ambit of Plant Nutrients. Firstly, the ‘Proacqua’ line of products caters to water soluble plant nutrition solutions. Secondly, the products lying under the ‘Potassium+’ product line assist in providing a premium potassium source to help plants reach their full yield potential. Thirdly, ‘Wolftrax’ caters to micronutrient secondary nutrient fertilizers that are designed to be coated onto dry fertilizer blends. Lastly, ‘Rocket Seeds’ offer a portfolio of nutrient rich sources to assist young crops in withstanding harsh climatic conditions.

Magnesium Chloride: The harvestation of the companies MgCl is conducted in the Great Salt Lake in Utah. They’re the only producer of naturally occurring magnesium chloride. The product lines usually cater to additives of stand-alone deicers. It may also be used as a dedusting and stabilizing agent for gravel roads and an early stage plant nutrient for wheat crops.

Storage Solutions: The company’s ‘DeepStore’ product line of storage solutions helps personalize storage solutions as per client’s needs. Their project managers have experience in managing archive migrations and seeing the end-to-end delivery of the process. They also provide an underground storage solution which is free from vermin, flooding, and UV light.

Index Outlook

Index: S&P 400 Midcap (1,817.27 as on 26th September 2020)

Support and Resistance Analysis

Graph 1: Support and Resistance analysis for S&P Midcap 400 (Investing.com as on 26/09/2020)

As on 25th September 2020, S&P Midcap 400 closed at 1817.27, after having dropped 24.96 points since the opening of the trading day. Ever since the COVID-19 crash, the index witnessed an extremely bullish run, thereby marking a healthy V-Shaped recovery. However, only until very recently (i.e. since 2nd - 3rd September 2020), has the index witnessed a trend reversal owing to the major correction that has come across the wider American indices due to the ‘technology sell-off’. As per our analysis, the immediate support for the index is at 1,780 and the immediate resistance is at 1,840 (as shown by the yellow rectangles in Graph 1).

Graph 2: Fibonacci Levels for S&P Midcap 400 (Investing.com as on 26/09/2020)

Moreover, based on historical analysis of the index, some of the other crucial levels in addition to the immediate support and resistance are 1,740 and 1,710 on the downside and 1,900 and 1,960 on the up-side respectively (as shown by the orange and blue rectangles respectively in Graph 1). The strength of these levels is further highlighted by the Fibonacci Levels that have been shown in Graph 2 and the fact that most of these levels are ‘round numbers’ in nature which tend to be psychologically strong. As it can be seen, the 1,900 - 1,905 and 1,740 - 1,750 levels have been particularly strong for the index, with 1,903 and 1,749 being the 0.786 and 0.618 retracement levels respectively.

Trend and Pattern Analysis

Graph 3: Trend Analysis for S&P Midcap 400 (Investing.com as on 26/09/2020)

As shown in Graph 3, the index was following an extremely distinct bullish trend line (as highlighted by the black line in Graph 3) until it was breached between 3rd - 5th September, 2020. Before this, the index had been forming higher-highs and higher-lows throughout the recovery rally. However, on 4th of September, 2020 this trend line breach was complemented with a break-down of the immediate support of the index, making the trend-reversal inevitable. In fact, ever since the index has broken its rising trendline and immediate support of the 1,900 - 1,905 levels, it has entered a parallel down-trend channel (as highlighted by the blue lines in Graph 3).

Graph 4: Pattern Analysis for S&P Midcap 400 (Investing.com as on 26/09/2020)

In terms of significant pattern formations that have been witnessed in the index lately, the breakdown on 5th of September, 2020 was a classic ‘Double-Top’ formation breakdown (as shown by the red lines in Graph 4). Also, as it can be seen in Graph 4, the index has been forming lower highs and lower lows-which is an extremely strong indication for a bearish-trend reversal and correction-undertaking in the market.

Graph 5: Bollinger Band Analysis for S&P Midcap 400 (Investing.com as on 26/09/2020)

However, although we are bearish on the market moving forward, we believe that the selling pressure in the market has been long extended and that in the coming week we can expect a pullback in form of some buying in the index in order to fill the gap (as shown by the yellow box in Graph 3). This aspect is further highlighted by our Bollinger Band, Although it is true that the candlesticks outside the lower bound of the band on 4th and 8th of September, have indicated an extremely strong bearish reversal - the price movement always tends to test the 20 MA. Resultantly, the price movement in Graph 5 is testament to the fact that it is way too extended away from the 20 MA because of which we are expecting some level of buying to come the index’s way in the very short term (i.e. 2-3 days).

Moving Average, DMI and RSI Analysis

Graph 6: 20-day and 5-day MA & DMI Analysis for S&P Midcap 400 (Investing.com as on 26/09/2020)

On 3rd September, 2020 the index observed a negative crossover between its 20-day and 5-day MA and has been trailing the down-trend ever since (i.e. it has been testing the 20-day MA and dropping back). What was particularly unique about this negative cross-over was that it coincided with a Directional Movement Index crossover, such that the -DI line (i.e. the red line) overtook the +DI line (i.e. the green line) . This is particularly insightful because whenever the -DI line is above the +DI line, it implies that there is a greater downward pressure on the price. In fact, even the current positioning of the two lines signify that there is downward pressure on the price. However, in line with the point previously brought up - we believe that the divergence is a bit extended at the moment which furthers the case for a correction to come and some buying to be witnessed.

Graph 7: RSI Analysis for S&P Midcap 400 (Investing.com as on 26/09/2020)

Finally, after having breached its long-time support of the 44.4 level on the Relative Strength Index on 4th September, 2020 - it did enter back the >44.4 level (as shown in Graph 7). However, given the bearish sentiment of the market, the index was not able to sustain this level and breached it again between the 17th and 18th September, 2020. Resultantly, moving forward we believe that this support-become-resistance level on the RSI is going to have a decisive impact on the future movement of the index. In our opinion, only once this level is broken convincingly, can we expect the trend reversal on the upside to return.

**The ‘*Tech Sell-off’***

Graph 8: RSI Analysis for S&P Midcap 400 (Investing.com as on 26/09/2020)

As noted earlier, all indices across the American markets have been witnessing a significant amount of correction which has percolated down to stock markets worldwide. A predominant reason for this correction has been attributed to the bulk sell-off technology related stocks witnessed across the American Indices after having witnessed an unprecedented rally ever since the COVID-19 Crash.

In order, to put this into perspective, we have plotted the S&P Information Technology 400 and the S&P Information Technology 500 Index alongside the S&P Midcap 400. As it can be seen, post 3rd September, the direction as well as the nature of the movements across the indices towards the downside have been identical - highlighting their enhanced degree of interdependence. This may be a particularly important observation to keep in mind while moving forward as the global community rises from the pandemic and shifts its focus to other consumer based and ‘outside the home’ industries.