Almost a month ago, on Apr. 9, Monsanto Company (NYSE:MON) jumped on news that the Department of Justice would approve its deal to be acquired by Bayer AG (ADR) (OTCMKTS: BAYRY). Monsanto stock has been hugging $125 ever since.
Since Apr. 9, the Bayer-Monsanto deal has received approval from Russia and the EU as well. The DOJ’s approval contradicts the sentiment from late March, where regulators were seemingly not happy with the $62.5-billion deal.
Some investors are asking themselves if they should buy Monsanto stock at this point.
What to Do With Monsanto Stock
Bayer’s original offer for Monsanto was for $128 per share. With shares hovering around $125, why bother chasing MON stock at this point?
It’s one thing to buy a stock before an acquisition of the company is announced. But unless a bidding war is about to ensue, there’s not much reason to chase the stock. Doing so leaves investors in a vulnerable risk/reward situation. Meaning that, should the deal fall through, MON stock will take a big tumble. Those big losses would come in a hurry too, likely in one harsh session.
On the flip side, assuming that the deal goes through, how much upside is there? In this case, there’s around $3 per share left in profit. That’s about a 2.4% gain in the case of Monsanto, and that’s not factoring in commissions. The bottom line? The reward is simply not worth the risk. We are risking, at a minimum based on the charts, $10 in downside for just around $3 in upside.
While admittedly unlikely, what if regulatory hurdles put a halt on the deal? While governments around the world are giving the green light to the Bayer-Monsanto deal, a change in that plan could land a big hit on MON stock.
Trading MON Stock
I wanted to provide a visual look for MON stock and show where the risk/reward lies.
Click to Enlarge
There is just a fractional amount of upside to $128. A glance at analysts’ price targets says the same thing: MON stock price is going to $128.
This isn’t like when Qualcomm, Inc. (NASDAQ:QCOM) was set to buy NXP Semiconductors NV (NASDAQ:NXPI), and shares were driven higher on the premise that a higher offer was likely. Or when Broadcom Inc (NASDAQ:AVGO) tried to buy Qualcomm with ever-increasing offers. Note that both deals fell through.
In any regard, there isn’t a higher bid coming for Monsanto stock. Which makes this a name heading to $128 barring any unforeseen events unfolding. Should there be a hiccup, Monsanto stock could quickly find itself back at $115 — and that’s if there’s still hope for the deal.
If the deal came off the table, MON stock would likely fall even further. I’d be reluctant to buy the pullback in the unlikely event it happens. Because if so, it means doubts of the deal are resurfacing. It would very much depend on the specific cause of the pullback.
Alternatives to Monsanto Stock
Investors who have been long Monsanto stock can consider taking profits if they’d like to cut out the risk of the deal falling through. Further, they can do so to expedite the profit-taking process, having squeezed out most of the upside in MON stock.
New buyers should avoid MON and look elsewhere. One alternative is DowDuPont Inc (NYSE:DWDP). The merger between Dow and DuPont created a number of powerful businesses with a lot of break-up potential. Further, as part of the deal, DWDP was forced to divest its crop-protection business, which was purchased by FMC Corp (NYSE:FMC).
FMC has an average analyst price target of over $97, implying almost 20% upside from current levels. That goes alongside a reasonable valuation amid a strong growth profile. For DWDP’s part, the average analyst price target of almost $84 implies more than 35% upside from current levels.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
