Chart of the Day – MON Growing Leaps and Bounds

by Enis May 22, 2014 12:25 pm • Commentary

MON is breaking out to a new 5 year high on strong volume today:

MON daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
MON daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The stock has been particularly strong since May 5th, when Larry Robbins of Glenview Capital announced MON as his top long idea at the Ira Sohn conference.  Larry Robbins had a stellar 2013 thanks to many top health care investments, so his selection for the conference was highly anticipated.

The rationale for his MON investment was laid out by Alex Gavrish at ValueWalk as follows:

In its recent quarterly letter to shareholders, the fund manager discussed the concept of investing in “convertible equities”. The idea is to invest in companies where you can achieve a minimum specific return, or “guarantee” a certain level of certainty as to the profitability while at the same time receiving cheap optionality on higher return “scenarios”. The additional upside optionality can come in many forms, such as a business restructuring, capital structure optimization, growth from new products and ventures, and other sources. According to Robbins, Monsanto presents just such an opportunity. Monsanto Company (NYSE:MON) is an almost monopolistic company with a wide moat in its industry – this will guarantee a reasonable base case return scenario. At the same time, you receive upside optionality, or “call options” on such areas as business growth from new products, potential optimization of capital structure as the company has excess debt capacity, and a promising “precision farming” technology which can become a major contributor to profits over the coming decade and can even become a separate business through an IPO.

Monsanto has grown earnings 10-30% in every year since 2011, and has grown sales 5-20% on an annual basis in that period as well.  Similar growth is expected over the next few years, and the stock is valued at around a 24x P/E multiple, reasonable given the growth.  The stabilization of the business is encouraging after a rapid growth period between 2006 and 2008 (which saw the stock go from $45 to $145) which was driven by a huge boom in agriculture and crop prices.

Today’s breakout is an encouraging technical sign for the bulls.  The fundamental story makes sense to us here. We’ll keep this stock on our watch list and see how it handles the breakout in the weeks to come, with a possible trade in the future if it retests the breakout in a healthy fashion.