Despite the negative market tone today, fertilizer stocks are springing to life after China Agritech Inc. (CAGC) announced second quarter results.

The company reported a 63% increase in net revenues and a 33% increase in gross profits.  Adjusted EPS were $0.37 compared with analyst expectations for 33 cents per share and management’s comments encouraged traders who have bid the stock nearly 20% higher in mid-day trading.

We are not only increasing our customer base and broadening geographic penetration, but also receiving more inquiries from farmers and distributors on the functionalities of our product

~Yu Chang, CEO

Fertilizer stocks have been on a tear since early July when traders began to turn their attention back to emerging markets and the opportunities provided by a global population that is not only growing in number but also features a higher standard of living. This broad concept is being accentuated by several important shorter-term catalysts:

• Economic data out of China and India support additional stimulus measures
• A major drought in Russia is disrupting wheat supply
• Inflation fears are spurring financial interest in commodities.

This morning, subscribers to our Strategic Intelligence Reports received our latest research on fertilizer stocks which included our favorite three opportunities in the area.  (This information will be available on the Mercenary Trader site on a delayed basis but you can sign up to receive the Mercenary Dispatch 48 hours before it is released to the public).

China Agritech received a significant amount of new capital during the quarter as the company completed a common stock offering and also received $10 million due to a private equity partner exercising warrants.  The capital is earmarked for establishing distribution centers which should contribute to revenue stability and growth over the coming quarters.

Management reiterated their guidance for 2010 revenues of $114 million and net income of $23.5 million.  Sales are expected to accelerate in the second half due to farming trends.  CAGC has a unique focus on organic fertilizers but the drivers which are affecting their business are also tailwinds for the larger fertilizer companies which operate more traditional businesses in the area.

China is particularly important to fertilizer companies because the country’s grain demand has now exceeded that of the US and is expected to grow at a much faster rate than the more developed world.  So CAGC’s perception of the overall market carries significant weight for the entire industry.  All three of the fertilizer stocks mention in our SIR report are up more than 3% in mid-day trading.

Jack and I picked up some exposure to the area in July when the fertilizer stocks were breaking out, and the recent price action helps to increase conviction and gives us an opportunity to add exposure horizontally to different names or vertically by increasing our position size.

Despite financial and economical uncertainty in developed nations, China’s demand for agricultural commodities can only grow over the next few years and we are seeing the government make global acquisitions to prepare for this rising demand.  From a trading perspective, we are still wary of capital ebbs and flows, but for now the fertilizer industry as well as other ag-related stocks appear to be forming very attractive trading patterns.