Agriculture biotech giant Monsanto (MON) is expected to report a decline in profits for last quarter on Wednesday, but that may be where the pessimism ends. And that could be a problem.
Don’t get us wrong. We love where Monsanto sits in the world food chain. The company holds important seed patents that fit in well with the need for increased agricultural output worldwide. And the stock is about half its all-time high, reached in mid-2008, so its valuation looks good.
But we’re looking at the short term, and that’s where the problem lies. Expected crop yields are reportedly very high right now and prices are depressed. Ag is not the hot area it used to be.
The stock itself is languishing below its 20-day moving average and showing little sign of life. Although $70 looks like a support level, the shares have shown little interest in moving higher of late.
Perhaps more concerning is the optimism we’re seeing toward MON. Options players are showing a marked preference for calls, while nearly 60% of covering analysts rate the stock a “buy.”
A look at the chart above should make you ask why there’s so much optimism. Maybe they’re trying to call a bottom, but that’s a dangerous game to play.
The other factor that concerns us is that the stock has performed poorly after recent earnings releases. The shares have fallen substantially within a couple of weeks after the past three such reports, an ominous sign. These moves often take a few days or even a couple of weeks, but the drop comes eventually.
Like we said, we like MON as a longer-term play, but we’re in the business of trading short-term options on earnings news. The setup for MON next week looks bearish to us based on recent post-earnings price action and sentiment that appears too optimistic given how the shares have sagged during the past three months.
Unless you plan to bet on short-term weakness using put options, we’d stay away from MON for now, even if you like it for the long term. Let the earnings news play out, and let the stock show some strength before jumping back in. A break above the 20-day moving average isn’t enough to get us interested on the long side, but a break above the 50-day, just above $74, could be.
Related Articles:
- 4 Cheap Option Trades on Expensive Stocks
- How to Play a Post-Earnings Move
- Emerging Markets ETF Could Explode
The 10-to-1 Options Trading Secret
John Lansing reveals how to break down scientific chart analysis into easy-to-make trades that will have you trading, and profiting, with confidence in no time. Learn how to leverage your profits 10 times larger with a tiny investment. Download his FREE trading guide here.
