Nassim Taleb has been making headlines lately in his relentless attack on Genetically Modified Organisms and the corresponding lobbyists and industry promoters. Mark Buchanan summed up the research in a recent Bloomberg article:
Like many people, I’ve long wondered about the safety of genetically modified organisms. They’ve become so ubiquitous that they account for about 80 percent of the corn grown in the U.S., yet we know almost nothing about what damage might ensue if the transplanted genes spread through global ecosystems.
How can so many smart people, including many scientists, be so sure that there’s nothing to worry about? Judging from a new paper by several researchers from New York University, including “The Black Swan” author Nassim Taleb, they can’t and shouldn’t.
…
Science is at its best when it acknowledges uncertainty and focuses on defining how much can be known. In the case of GMOs, we know far too little for our own good.
While this debate is likely to remain on the theoretical plane at the moment, the increased publicity could be a risk for the industry over time. Monsanto is the leading agricultural genetics company in the world and obviously stands to lose the most if stricter regulations start to enter the conversation for GMOs. So far in the U.S., the pushback has been in the form of failed statewide ballot referendums out West on labeling of GMO foods and some legal wrangling in New England. But in Europe, some regulations are already in place, and the real risk to companies like Monsanto could come in the form of pushback from the developing world. That has already started in places like Brazil:
Large-scale farming in the bug-ridden tropics has always been a challenge, and now Brazil’s government is concerned that planting the same crops repeatedly with the same seed technologies has left the agricultural superpower vulnerable to pest outbreaks and dependent on toxic chemicals.
This is a long term story though. There is likely nothing major on the near term horizon, but there is risk is that government officials mention this research as a reason to perhaps look more deeply at the implications of genetically-modified crops and the industry as a whole.
The stock likely is not pricing in such a risk, given its low probability, but I became intrigued when I saw that implied volatility in MON is near a 2 year low:
[caption id="attachment_48235" align="alignnone" width="600"]
MON 30 day implied volatility, courtesy of Bloomberg[/caption]
Aside from the possibility of more media attention on the risk of GMOs, MON also reports earnings in early January, so Jan15 optionality might be a decent purchase. I discussed the fundamental and technical situation in MON in a NTT post about 4 months ago. In that post, I noted a report by GS Research detailing that the agricultural industry was likely on the cusp of a 1-2 year downturn in investment as a result of falling crop prices and overcapacity in the industry after numerous boom years for farming. MON might be more insulated than other agricultural companies since its seed business has continued to gain share and management has outlined a more levered balance sheet to increase share buybacks.
Technically, MON has rallied nearly 15% from its mid-October low, right back to the important $120 level:
[caption id="attachment_48234" align="alignnone" width="600"]
MON daily chart, courtesy of Bloomberg[/caption]
Analysts have modeled in 24% EPS growth in 2015 for MON, with the bulk of that coming in the fiscal second and third quarters. The January report is for the fiscal first quarter, for which the bar is quite low. However, guidance will be crucial for the big second quarter result.
With implied volatility low, I was considering a put diagonal such as buying the Jan15 120 put and selling the Dec20th 115 put, for about a $3.00 debit. That trade captures earnings, but sells the shorter dated Dec20th expiration, for which there are no near-term catalysts. Given the broader market strength, I held off from executing this position, but wanted to lay out the thoughts on MON given the interesting background on this name.