Monday, July 16, 2012

MON breaks out

Monsanto Co. (MON) has broken above the prior higher high of $83.95 set in January. However, the price remains within a sideways trend that ran from late 2008 through 2009, so if there's any credence to market memory from that long ago, MON faces some serious resistance.

Monsanto is best known for biotech seeds and herbicides that boost productivity in agriculture. The St. Louis, Missouri company is a major player in what opponents of genetically engineered cuisine call "franken-food" and supporters call "the future of eating".

Big picture, MON fell sharply 2008 when the recession kicked in, to a plateau ranging from about $70 to $90. It then fell sharply in 2010 to a post recession low of $44.61.

It has since recovered to nearly double that low price. The January high was followed by a retracement back to $70 -- perhaps no surprise, that's the floor of the 2010 sideways trend -- and then stair-stepped up to today's high of $85.53 (so far), the highest level ever since the price crashed in 2010.

If the $90 ceiling set by the 2010 sideways trend is still in place, that would give MON room for a 6% run-up before resistance. A break above $90 would be very significant on the chart. A retreat below $84 would negate the current breakout.

Analyst enthusiasm is running at 22% -- unchanged from a month ago. That level is positive for the stock, but also gives room for more analysts to jump on board.

Monsanto reports return on equity of 18% with low long-term debt amounting to 18% of equity. Annual earnings grew over the prior year in 2008 and 2009 but stumbled sharply in 2010, the year the stock price crashed. Earnings recovered in 2011 but remain below the 2008/9 levels.

Quarterly earnings are seasonal, peaking in the spring 2nd quarter -- farms, planting season, the seasonality is no mystery. Earnings have accelerated the past two 2nd quarters over the corresponding quarter a year earlier, both with upside surprises.

Of the past 12 quarters, three have shown losses, eight have shown upside earnings surprises and four have surprised to the downside.

Institutions own 83% of shares and have bid up the price to relatively  high levels. It takes $3.27 in shares to control a dollar in sales.

MON on average trades 2.76 million shares a day, sufficient to support a good supply of optoins with narrow bid/ask spreads and high open interest.

Implied volatility stands at 25%, at the low end of the six-month range, and has been stair-stepping lower since early June. Options are pricing in confidence that 68.2% of trades will fall between $79.24 and $91.74.

MON is trading above its five-day fair price range, which runs from $81.88 to $83.37 and encompasses 68.2% of trades surrounding the most-traded price, $82.70. The price is also above today's fair price range of $83.87 to $84.92, with $84.60 being the most-traded price.

Monsanto next publishes earnings on Oct. 3. The stock goes ex-divided in October for a quarterly payout yielding 1.4% annualized.

Decision for my account: Good chart, good financials for a momentum trade. Longer term, I think the numbers support a growth trade, but the stock is over-priced for a value postion.

But I'm a momentum trader, so I've opened a position in MON. I structured it as a bull put credit spread expiring in August, long the $82.50 put and short the $85 put. The position has a potential profit of 55% of risk and is profitable at expiration down to about $84.12.

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.

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