Thursday, May 27, 2010

Monsanto - I Should Have Known Better

I really have been doing this too long to excuse this screw-up.

In my experience, companies that lower guidance generally don't just do it once or twice before they hit bottom and resume their prior trend. Disappointments often come in threes (or more) and it takes time for a management team to root out and address whatever it is that went wrong in the first place. And yet, like some newbie investor, I rushed in to buy Monsanto (MON) after its recent underperformance and disappointing guidance. 

Pretty much from the moment I clicked "Execute", the stock has gone down. Today I get my just desserts in that the company is lowering guidance yet again, and the stock is taking another punch to the gut.

If there is any good news here, and there really isn't, it's that the disappointment is coming from the company's glycophosphate (weed killer) business. This business is far more cyclical than the company's larger seed traits business, it's more of a commodity business, and it has been an underperformer in recent times. On top of all that, reports have been coming out in recent months that glycophosphate-resistant weeds are emerging in the Southern U.S. (as if we don't have enough trouble with kudzu!).

So although this news hurts the company's near-term financial performance, it doesn't change a thing about my long-term thesis on the stock. Simply put, Monsanto is a leader in next-gen crop research, and I believe this is one of the best sectors to be for the long-term. True, DuPont (DD) and Syngenta (SYT) both seem to be getting their "stuff" together and closing the gap on Monsanto (especially Syngenta here of late), but I think Monsanto is still positioned to be the long-term leader in this field.

I'm likely setting myself up for more near-term underperformance, but I'm grudgingly hanging on to my shares. I think most of the bad news is now priced into the stock and I think the company is more or less "clearing the deck" in terms of its forecasting. Like I said, my long-term thesis on this company hasn't changed, so I don't feel any compulsion to sell quickly and move on.

Since I have the advantage of not having a boss or investors to answer to, I might as well make the most of it and not be shaken out of a stock where I still have long-term conviction.

In the meantime, I'll just feel stupid for a little while and then move on to the next crisis.

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