Tuesday, October 23, 2012

MON: Chart, fundamentals diverge

Monsanto Corp. (MON) broke below a sideways range that has set a floor of $87.57 since Sept. 6. That pattern is part of a longer sideways trend that followed a swing high of $87.77 set on July 20.

The price has made it to higher levels, reaching $92.20 on Oct. 10. But the broad movement for this period has been sideways. Even an earnings miss on Oct. 3 barely budged the price.

Before the present floor was established, there was a floor at $84.86, which marks the low since the sideways trend began last summer. I will consider the sidewinder to be in effect until MON breaks below that level.

The break below $87.57 today triggered a bear signal under the Turtle Trading rules and it made it past the chart filters I use under my trading rules.

Longer term, MON has been on the rise since July 2010, with the most recent leg up having begun last May at $70.15.

Monsanto is best known these days as a biotech company. Its main business used to be chemicals and plastics, but by 2002 it had divested itself of those activities to concentrate on agriculture, including genetically modified foods, which it pioneered in the 1980s.

So the Creve Coeur, Missouri company is in many ways a story play, like any company that stakes its future on new technology: Here's the shiny new stuff. It will change the world, and make money, as well.

Monsanto's story is muddied by the fact that genetically modified crops -- "frankenfood" to detractors -- are politically controversial, especially in Europe. It's a classic case where policy can quickly impact profits.

Analysts, in fact, are bullish on Monsanto. They're showing an enthusiasm index of 33%, up from 22% two months ago.

And the company does have a decent return on equity, at 17%, with low long-term debt, at 17% of equity. (Not a typo, the percentages are identical, although their meanings differ considerably.)

Annual earnings per share rose in 2010 and 2011, each over the prior year.

The quarterly earnings tend to peak in the 2nd quarter, which on the company's fiscal calendar covers winter, as I would expect from an ag company; farmers buy seeds and supplies in winter so they can be ready for spring planting.

The 2nd quarter this year advanced over the year-ago quarter, which was also higher than a year earlier. The last three 4th quarters, which cover summer, have all shown losses, with Q4 this year showing a bigger loss over its 2011 counterpart, which in turn was a greater loss than Q4 in 2010.

Of the last 12 quarters, four showed losses and the rest were profitable. Eight showed upside earnings surprises, while four surprised to the downside.

Institutions own 83% of shares and the price has been bid up to a high level. It takes $3.52 in shares to control a dollar in sales.

Although the breakout is to the downside, those financial stats bias my opinion of Monsanto to the upside. So there is a divergence between the trading signal and the fundamentals.

MON on average trades 2.9 million shares a day. This supports an adequate inventory of option strike prices with open interest running to the three and four figures near-the-money. The front-month at-the-money puts have a bid/ask spread of 2%.

Implied volatility stands at 24%, in the lower half of the six-month range, and has been on the rise since Oct. 17.  Options are pricing in confidence that 68.2% of trades will fall between $81.10 and $91.10 over the next month, for a potential gain or loss of 7%, or between $84.22 and $89.98 over the next week, for a 3% gain or loss.

Options are trading 34% above their five-day average volume, with puts leading at 48% above average, compared to 18% above for calls.

With 2 hours plus change to go before the close, the fair-price zone on today's 30-minute chart runs from $86.49 to $87.32, encompassing 68.2% of transactions surrounding the most-traded price, $87.08. The stock is trading near the most-traded point.

Monsanto next publishes earnings on Dec. 31. The stock goes ex-dividend in January for a quarterly payout yielding 1.72% annualized at the current price.

Decision for my account: I passed up the trade despite the Turtle signal because the direction of the signal, bearish, diverges from the bulllish bias of the financials and other fundamental analysis.

The support and resistance levels suggest waiting until a break below $84.86 before taking the trade, if in fact the price does indeed move below that level.

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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