There’s no way around it — 2015 has been a tough year to navigate. Some of the hardest-hit stocks this year have been in the most conservative of sectors, including REITs, midstream pipeline MLPs and boring old utilities.
But getting hit harder than any of them is agri-giant Monsanto (MON). After topping out in February at $126 per share, Monsanto stock has spent most of the past seven months in free fall. The stock bottomed out in late September at $81.22 and is sitting a little above $88 as I write this. That’s down by nearly a third from its highs earlier this year.
When it rains, it pours. Monsanto reported fiscal fourth-quarter earnings that were much worse than expected. MON lost 19 cents per share last quarter, whereas the consensus was for a mere one-cent loss. Revenues also came in lower than expected and were down 10.5% year-over-year. Really capping it off, Monsanto announced it would be laying off 2,600 workers.
So, what’s going on with Monsanto stock, and might there be some value in the wreckage?
Monsanto stock has been clobbered by a perfect storm of factors. The strong dollar is keeping a lid on commodity prices and eroding the value of MON’s foreign sales. Bigger picture, the popularity of organic food, along with fears about the safety of genetically-modified foods, have made Monsanto into something of a pariah. There is even a movement called “Millions Against Monsanto” dedicated to opposing Monsanto.
But more than anything, it’s just a lousy market for many soft agricultural commodities right now. Crop prices have been falling, giving farmers less incentive to fork over money for MON’s products.
Outlook for Monsanto Stock
Looking longer-term, there is quite a bit to like about Monsanto stock. To start, it is reasonably cheap after its recent haircut. Monsanto trades for 13 times next year’s expected earnings. And its price-to-sales ratio is sitting close to 10-year lows. And while Monsanto stock is not a particularly high yielder at current prices — its dividend yield is just 2.2% — Monsanto has been a dividend-raising monster.
Over the past five years, it has grown its dividend at a 11.4% annual clip. And over the past 10 years, the dividend growth has been nearly 21% per year. If you’d bought Monsanto stock 10 years ago, you’d be enjoying a dividend yield on your original cost of a whopping 14.9%.
And the future for Monsanto looks bright, for two simple reasons: People hate it, and it’s not going away.
Whether you love Monsanto or hate it, the world — and particularly the emerging world — needs Monsanto’s products. While organic farming is an affordable luxury for upper-middle-class Westerners, the developing world needs cheap food in order to boost living standards.
It’s the uncomfortable truth that affluent shoppers at Whole Foods (WFM) prefer not to recognize, but if we all ate exclusively organic food, the world’s poor would starve to death. If you think I’m exaggerating, think back to the ethanol craze of the mid-2000s. This sudden new demand for corn cause the infamous “tortilla riots” in Mexico. And Mexico is actually a middle-income country, not a poor one.
Despite the lousy results of the past year, Monsanto still believes that it is on track to double its 2014 earnings per share by 2019.
MON: The Next Great Sin Stock?
I’ve written before about the appeal of vice investments, or “sin stocks.” In the past, this meant buying social pariahs like Big Tobacco stocks. Their outcast status made them perpetual value stocks with fat dividend yields and outsized total returns.
Well, yield-starved investors have destroyed that investment theme. Tobacco stocks are still pariahs, to be sure, but most now trade at premiums to the broader market.
This brings me back to Monsanto. From the populist rage against the company, you would get the impression that the company had the moral compass of a drug dealer. I’m not going to wade into a political minefield; we all have issues we care passionately about. But a lot of the anger towards Monsanto is based on, at best, half-truths.
For example, it’s widely believed that Monsanto extorts famers that inadvertently use patented Monsanto seeds that might have blown over from a neighboring farm. While their have been lawsuits — more than 140 through last year — and Monsanto has been extremely aggressive in its tactics, Monsanto has never gone after farmers that truly had trace amounts of seeds.
Is Monsanto the new “vice investment”? Maybe. If so, this means two things: First, its longer-term returns should crush the market. But it also means that investors shouldn’t expect any short-term miracles. Its valuation is likely to remain depressed for a while.
Still, if you’re not afraid of catching that proverbial falling knife, Monsanto stock is worth a look. It’s trading at levels first seen in 2007 despite being a vastly bigger company today.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.