After a difficult 2018, investors may consider adding Bunge (NYSE:BG) stock, a leading trader and processor of farm commodities, to their portfolio for the rest of the year. There are several long strategies in Bunge stock that could lead to impressive profits.
On Aug. 1, BG management painted a mixed picture when it reported Q2 earnings. With annual sales of $40 billion, the company is heavily dependent on global agribusiness which at times leads to fluctuating operations and profitability.
Bunge’s unexpected loss of $125 million in Q2 came from a wrong bullish bet on Chicago soybean futures when the company prematurely speculated that the trade war between the U.S. and China would be short-lived. However, as the war of words between the U.S. and China escalated and China stopped importing U.S. soybeans, the price of soybean futures plummeted, and BG incurred a significant loss.
Besides, the company took a $24 million hit from currency hedges in its Brazilian operations. Despite a $12 million net loss reported in Q2, Bunge CEO, Soren Schroder, was hopeful that the high margins in soybean processing would help the company back to profitability within the next quarter.
Indeed, BG’s main competitor Archer Daniels Midland (NYSE:ADM) has also benefited from expanding soy crush margins. ADM, whose operations are more U.S.-centered, have not been exposed to trade wars and Brazilian currency swings as much as Bunge. There are on-going rumors that ADM will make a takeover bid on the BG stock, which has strong brands and processing technology.
Bunge has paid handsome quarterly dividends over the past years with a current dividend yield of about 3%. The most recent dividend payment was made on Sept. 5 to stockholders of record on Aug. 22, 2018.
September has seen a stabilization of the Bunge stock price around the low $60’s level. Those investors who pay attention to moving averages should note that the technical message has improved to a “buy,” while oscillators are giving a wider range of “neutral-to-buy” readings. Short-term support for BG is ﬁrst at $64.2 and then at $62; meanwhile, short-term resistance in BG stock is ﬁrst at $67.4 and then at $71. BG’s 52-week price range has been $61.28 (Aug. 15, 2018) — $83.20 (Feb. 5, 2018).
If you are also of the opinion that the executive management is going to further improve its balance sheet and that Bunge stock is ready for a rebound on both technical and fundamental grounds, you may want to add BG to your portfolio this September.
The past two weeks have been especially good for Bunge. Therefore, a slight pull back might occur in the BG stock price during the rest of the week and offer even a better entry point for investors. Depending on individual portfolio allocations and risk/return profiles, here are the three types of trades set up for BG stock (prices are based on BG stock’s closing price of $66.18 on Sept. 20):
Three Bullish Strategies on Bunge Stock
1. Buy 100 shares of Bunge stock at a limit price of $66.18. You should expect to hold this long stock position for up to one to six months for an approximate 8-10% gain. You may consider placing a stop loss at about 3% below your entry point.
2. Use a covered call whereby you would buy 100 shares of Bunge at a limit price of $66.18 and at the same time, sell a BG Jan 2019 $65 call option, which currently trades at $4.25. The $65 option is slightly in-the-money (ITM), offering more downside protection in case of volatility and a decline in BG stock.
This call option would stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this covered call trade at the closing prices on Thursday, Sept. 20, at expiry, this trade would break even at a BG stock price of $61.93 and the maximum return would be $307 at a price of $65 at expiry (excluding trading commissions and costs).
3. Sell a Jan 2019 $65 put option with a limit price of $3.05 — its closing price on Sept. 20.
This put option would also stop trading on Jan. 18, 2019 and expire on Jan. 19.
Assuming you would enter this put selling strategy at the closing prices on Thursday, the upside is that you keep the premium as long as Bunge stock closes above $65 when January options expire (excluding trading commissions and costs).
The downside is that if BG stock trades below $65 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $65 per share.
At expiry, this trade would breakeven at a Bunge stock price of $61.95.
The Bottom Line on BG Stock
I believe a rebound in BG stock is coming. However, as prudent investors, it is always crucial to maintain a clear risk/return profile. Thus, if the rebound does not happen, a test of the previous lows and toward the high $50’s level could be the next leg down.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.