Monsanto is a Bad Seed

Monsanto Company (NYSE: MON) reports fiscal Q3 earnings Wednesday, June 30, before the market open. Analysts expect a modest increase in profits — $1.35 compared to $1.25 a year ago. The trouble is that MON has failed to meet expectations in the past two quarters. And for good reason.�

MON used to rule the roost with its tightly controlled, genetically rendered seeds. But that’s not the case anymore, as MON is no longer the dominant presence in the agriculture sector that it once was.�

Despite a plunge of more than 40% from its January high and 70% from its 2008 peak, the stock still sports a relatively high P/E ratio of around 20. That’s more than its peers and the overall agricultural chemicals sector. That means investors continue to consider MON overpriced, which just adds more weight to an already beleaguered stock price.�

Perhaps of more importance, it adds more pressure on MON to perform in its earnings numbers. Based on recent reports and the company’s teetering position within the sector, that could be a tall order.

MON’s chart is ugly. The stock hasn’t closed above its 20-day moving average in three months and is also struggling with its 10-day. In fact, the shares are trading at levels last seen in late 2006.

On the sentiment front, it’s interesting that options traders have been playing calls more than puts. With the put/call ratio now bouncing off an annual low, this could be changing, which tells us that selling pressure is on the rise.

In addition, analysts, while hardly enthusiastic about MON, still refuse to turn their backs on the stock. Just one of 16 analysts rates MON a “sell,” which leaves plenty of room for downgrades.�

With a lot riding on next week’s earnings, the odds are against MON blowing the market’s hair back. The MON July 50 Puts look like a solid play to bet on post-earnings weakness.

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