In the small town of Coffeyville, Kansas (population 10,000), I found two explosive investment opportunities that could skyrocket during the next two years. One pays a 9% dividend, while the other has incredible capital appreciation potential.#-ad_banner-#

But in order to tell you about these two investments, I first have to tell you about a group of stocks that’s dominating the market this year. And if you live in a region of the country like Kansas, where farming is a prevalent mainstay of the local economy, you probably know exactly what I’m talking about.

Fertilizer. Nitrogen fertilizer, to be exact.

Nitrogen fertilizers enable farmers to achieve higher crop yields per acre. The use of nitrogen fertilizer has been a driving force in modern agriculture and will continue to increase substantially as the global population expands and the demand for food increases. 

Since January, many premium, nitrogen-based fertilizer stocks have done quite well: 

• CF Industries (NYSE: CF): +55%
• Rentech Nitrogen Partners (NYSE: RNF): one of my previous picks +140%.
• Terra Nitrogen Company, L.P. (NYSE: TNH): +40%
• Agrium (NYSE: AGU): +55%

Many of the potash, phosphate and potassium-based fertilizer producers have also done well, such as Mosaic (NYSE: MOS) (up 21%), Potash (NYSE: POT) (up 4%) and Sociedad Quimica Y Minera De Chile SA ADR (NYSE: SQM) (up 16%). 

But as you may be able to tell, based on the returns of these stocks, not all fertilizers are created equal. 

The potash, potassium and phosphate-based fertilizers have performed relatively well, but not nearly as well as their nitrogen counterparts. I prefer the nitrogen-based fertilizers because their output (fertilizer) has less price sensitivity and often demands a premium from its customers.

Now, back to Coffeyville, KS.

CVR Partners (NYSE: UAN) operates its primary nitrogen fertilizer business in Coffeyville, with its feedstock coming from CVR Energy’s (NYSE: CVI) petroleum refining operations. Combined, CVR Energy and CVR Partners generated more than $5 billion in net sales revenue in 2011.

Now, although these two companies sound similar and are intertwined in their operations, the two businesses are very distinct. More importantly, each stock is compelling in its own right, yet has a different profile for investors.

CVR Partners
CVR’s nitrogen-based fertilizer technology converts low-priced petroleum coke into a hydrogen-rich synthesis gas. The syngas is then converted into anhydrous ammonia in an ultra-high efficiency ammonia plant. Subsequently, the ammonia is further upgraded into its final product — nitrogen fertilizer. 

Why is this complicated and technical process so important? 

Because CVR’s use natural gas as their primary raw material feedstock.

Historically, petroleum coke has been significantly less expensive than natural gas to produce fertilizer on a per ton basis. Prices are also usually more stable when compared to natural gas. By using petroleum coke as the primary raw material feedstock instead of natural gas, CVR has historically been the lowest-cost producer and marketer of ammonia and urea ammonia nitrate (UAN) fertilizers in North America.

Take a look at the chart on UAN:

The stock hit a peak in March and trended downward until June. Since then, it’s been on a tear. More importantly, the stock carries a 9% yield.

Petroleum refining can also be a highly profitable business. This process involves advanced methods to further process the crude into products such as gasoline, diesel fuel and heating oil. 

CVR Energy’s refinery also operates a crude oil gathering system and storage facility. In addition, it directly supplies customers with products through its tanker trunks division in Kansas.

CVR Energy
Petroleum refining can also be a highly profitable business. This process involves advanced methods to further process the crude into products such as gasoline, diesel fuel and heating oil. 

CVR Energy’s refinery also operates a crude oil gathering system and storage facility. In addition, it directly supplies customers with products through its tanker trunks division in Kansas.

CVR Energy does not pay a dividend but provides more diversification and upside potential in my opinion because of the exposure to fertilizers and energy, which are two booming industries.

Risks to Consider: One of the greatest concerns is the U.S. deficit problem. Many politicians have been calling for the curtailment of agricultural subsidies, especially those attached to corn-based ethanol. This could lead to a decline in demand for corn. As a result, we could see lower corn prices and acres planted, which could lead to less demand for nitrogen fertilizer.

Action to Take –> If you’re interested in CVR Partners (NYSE: UAN), I’d buy it up to $27 per share. This stock could hit $30-$32 within the next 12 months. While you are waiting, it pays a 9% dividend. I’d buy CVR Energy (NYSE: CVI) up to $37 per share. This stock could hit $50 within the next 12 to 18 months, which could be a great time to cash in on the strong demand for nitrogen fertilizers and petroleum refining.