Upside for Monsanto May Be Genetic

INTEREST IN AGRICULTURAL STOCKS is red hot, yet Monsanto, a leader in the global agricultural industry, is surprisingly attracting less-than-bullish options trading.

The stock's trajectory seems to be leveling off after rising 117% in the past year, and options traders are selling calls and puts in apparent anticipation the stock may now trade in a tighter range.

One investor, probably a hedge-fund manager, recently sold 4,000 July 150 calls, and also 9,000 July 90 puts. Other investors, according to Susquehanna Financial Group, sold Monsanto's April 120 and 125 calls.

The put-and-call trade, which was executed as a package, suggests a big investor thinks Monsanto's stock will not trade above $150 by July, nor will it fall to $90 from its current price of $111. Should the stock decline to $90, the investor would be obligated to buy the stock. Similarly, the investors who sold Monsanto's April 120 and 125 calls -- and it's not known if they own the stock -- probably doesn't think the stock advances to those prices by April expiration.
According to Trade Alert, Monsanto's options-trading sentiment has been primarily bearish. A Trade Alert tool that measures order executions determined that 60% of Monsanto's options trading was bearish, 23% was neutral, and 17% was bullish.

Of course, all the options-trading activity is very opportunistic and very focused on short-term trading patterns. In the long term, Monsanto is well positioned to capitalize on the growing global demand for food. Genetically Modified Organisms (GMOs), of which Monsanto has many, are expected to be increasingly important.

Credit Suisse, which initiated coverage of Monsanto today with a neutral rating and 12-month price target of $131, speculated that emerging markets would more eagerly embrace genetically altered foods than say some Western countries. "Europe may maintain resistance, but emerging markets – with greater urgency to feed rapidly expanding (and demanding) populations – are likely to embrace genetically modified organisms quickly and decisively," the analyst Mark W. Connelly, said in the research note.

In his estimation, Monsanto's leadership in the GMO market seems secure for much of the next decade. He said no seed competitor is poised to mount a "real challenge." His lack of enthusiasm for the stock reflects few opportunities for the stock to advance because all the good news is priced in.

Monsanto's existing investors may be disappointed to see the shares lose some of their upward momentum; the options trading hints at that. For everyone else who believes the agricultural markets and stocks are good long-term investments, Monsanto's current weakness is a buying opportunity.