Small-cap rally puts spotlight on Hanfeng

The Stock: Hanfeng Evergreen Inc.

Recent price: $7.73

Trend

A notable characteristic colouring the jostling field of Canadian equities as 2010 races from the post is the relative strength of small-cap stocks. The S&P/TSX small-cap index is up 14 per cent in the past 13 weeks and has hit new highs in 12 of the past 15 weeks. The performance of blue-chip TSX stocks is tepid by comparison. Although the S&P/TSX 60 index also hit a 52-week high in the first week of 2010 trading, this large-cap index is only up 3 per cent over the same 13-week period.

Cat:e528746c-3414-401a-b14b-50247e3bdf01Forum:d0fa4e14-88d2-41f9-8a19-896bdff9544b

Although many of these small-cap stocks are resource sector entries, the price momentum in the group gives investors reason to feel both confidence and concern as the year commences. Investor interest in small caps showed prominently in last week's trading activity of the exchange-traded fund representing the group. The S&P/TSX iShares Small Cap ETF (XSP-T) traded almost three times as much as the average weekly transactions in the final quarter of 2009.

The Trade

Hanfeng Evergreen is among the 184 constituents of the S&P/TSX small-cap index and is a familiar name to Canadian investors looking for exposure to the developing Asian market. The stock of this agricultural fertilizer supplier to China did not share in the stock market's 2009 revival through much of last year until trading activity in the stock - and other stocks in the industry - started to spur in December. The fertilizer sector was a winner last week as big names like Potash Corp. of Saskatchewan and Agrium Inc. rallied.

Investors taking a bullish view on fertilizers should be looking at Hanfeng's potential to revive a bullish trend as the global economy regains its footing, as well as the small-cap relative strength currently whetting investors' appetite. The stock started off the year as a Stock Trends Bullish Crossover, denoting a positive trend change from bearish to bullish (the 13-week moving average trend line moved above the 40-week moving average trend line). This is a basic bullish timing signal that often points to an establishing long-term price trend. Buyers of this stock should start lining up now.

The Upside

Hanfeng's shares face immediate price resistance at the current level, but a decisive move above $8 would make a price above $10 an achievable objective in the first quarter. During the agricultural commodity bull market in 2007 its shares rallied from $4 to $15 and held a sizable price momentum edge over large-cap stocks in the fertilizer group. Compared to its market peak in the summer of 2007, current trading activity in the stock is unremarkable. If the broad market stays true to the bull storyline, a 50-per-cent gain in Hanfeng's shares could be in the offing.

The Downside

Hanfeng's stock rallied during the first quarter of last year but failed to sustain its trend. In the end, fertilizer producers depend on the confidence of farmers in the returns they see ahead. If the bull scenario does not transpire for Hanfeng and other fertilizer stocks, investors should prepare for an exit if the stock drops below $6.70, a support level at the 13-week moving average trend line - 15 per cent below the current price.