Thursday, February 9, 2012

BG: Big Ag

Bunge Ltd. (BG), despite the name, makes its money from food crops, not from jumping off of bridges. BG is one of 16 large cap stocks that I screened today. It had the most bullish chart of the lot.

The White Plains, New York company is far from being the friendly family farmer. It has four business lines serving global markets.

1) It buys crops from farmers, processes them, and sells them to other companies that, often with further processing, bring them to the consumer.

2) It operates sugar cane mills in Brazil and sells the output as ethanol to fuel cars and electricity. (What a great anti-obesity and anti-tooth-decay program: Instead of eating sugar, burn it in place of coal, oil and natural gas.)

3) It produces edible oils -- that's the mayonnaise on your ham sandwich as well as the vegetable oil that fried your chips, and maybe the bread you spread the mayo on.

4) It sells fertilizer, to nourish new crops.

After hitting a peak of $135 in January 2008 before hard times hit, the company's stock dropped to its recession low of $27.60 in late October 2008. It then recovered to $72.98 in early August 2009, and from that, BG stalled, although with a slight upward tilt.

Since the recession low, the stock has set two higher lows, and two slightly higher highs. A rapid rise that began on Tuesday, Feb. 7, might be the beginning of the next leg up. But it might not. The chart remains ambiguous.

The ambiguity comes from where the price behavior today. An upward gap this morning followed by an intraday spring carried the price to a high of $63.65, just 15 cents below the last attempt, in late November 2011, to score a breakout.

But then the price pulled back, suggesting that the November breakout failure continues to act as a point of resistance. (Resistance often means that there is money that bought the stock at a peak before the price declines, and that money is eager to get out once the positions are back to break even.)

To sort out the various levels... At this point, I would code BG as in an uptrend both for the short term and long term, but a sideways trend for the mid-term.

The analyst consensus is that Bunge is a buy. However, the financials show it to be a rather staid company (as agribusiness companies tend to be). The return on equity is 9%, and the debt/equity ratio is 0.43. Best case, I would want to see a higher return and lower debt.

Institutions own 62% of the shares -- sort of low for a major player -- and the price is bargain basement. It takes only 16 cents worth of stock to control a dollar's worth of sales.

I don't generally do value analysis -- it requires more time digging into the financials of a company than I care to spend. But based on what I've seen so far, BG would count as a value investment rather than a growth play.

Today's price rise followed a pre-open earnings announcement that the company's net income fell 16% because of costs but the revenues were better than analysts had forecast. The 2011 annual earnings were down 60% from the prior year.

I think its notable that the price failed to break out on the news, but also that it rose sharply rather than following earnings into the cellar.

This tells me that the big money expects profits to turn around

BG, with average volume of 1.3 million shares, has a reasonable selection of options -- 10 strikes for March -- with open interest reaching into four figures for some options and narrow bid/ask spreads.

Implied volatility is at 25%, and it has dropped like a rock since hitting 32% yesterday. I would play BG as long options -- buying calls -- rather than selling vertical spreads for credit.

Next earnings will be announced sometime in May. The stock goes ex-dividend on Feb. 15 for a quarterly payout whose annual yield is 1.59%.

Decision for my account: I'm passing BG for now. I want to see a breakout past $63.80 before committing funds to this stock. Also, I've often seen exuberance over a happy detail in an otherwise marginal earnings announcement turn to second thoughts and a falling price. I'd like to give BG a chance to prove that impression wrong before opening a bull position.

I screened the stocks using a tourney bracket with a one-month daily chart and a three-day half-hour chart, and then turned to a five-year weekly chart for the broad context in analyzing the bracket winner. See my essay "10,000 Charts" for a discussion of my screening methods.
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

No comments:

Post a Comment