Put the Odds in Your Favor With Bunge

Most companies offer up occasion opportunities with outstanding risk/reward characteristics. Recognizing and acting on these ideas is one of the surest ways to garner great results. How can you know, though, that you're looking at such a promising situation? Positive factors include: Lower than typical P/E. Higher than average yield (for dividend paying stocks). Technical support based on previous trading history. Significant discount to a calculated Fair Value. Predictable upside. Insider buying at, or above, the current quote. Let's use global agri-business Bunge as an example. Commodity type businesses like Bunge often see large quarter-to-quarter and year-to-year profit swings. That can lead to signifcant relatively short-term (months, not years) share price movements in either direction. Buying into BG when it met the requirements listed above allowed for four great swing trading plays during the period 2010 through 2017. The recent December 2018 low point was almost certainly Bunge's latest fabulous entry point. How can I be so sure? Value Line expects BG to have earned about $4.20 per share in all of 2018. They see $5.00 as BG's likely EPS tally for 2019. That puts Bunge's forward P/E at around 11.1x, based on its Jan. 13, 2019, quote of $55.72. The stock's $0.50 quarterly dividend now provides a 3.59% current yield. Those compare with an average multiple for BG of 14.6x, accompanied by just a 1.91% yield. That checks off boxes #1 + #2 from my list. Bunge has solid technical support in the $50 - $55 range. In fact, it only broke below $50 once since the start of 2011. The exception came early in 2016 when the broad markets got off to their worst start to a year in history. BG bounced back from that very quickly and hasn't been sub-$50 since. Check off box #3. What would be a logical fair value for Bunge? Multiplying this year's estimate by a normalized 14.6x multiple generates a 12-month target price of $73. Independent research house Morningstar uses a proprietary method to calculate present-day fair value. They see BG as worth $74 right now. BG thus meets requirement #4 as well. Does Bunge offer predictable upside? You bet it does. A glance at the data below show that BG peaked between $74 and $93 per share during each of the nine calendar years running from 2010 right through 2018. With expected EPS near an all-time high there's no reason to think Bunge won't get back into that $74 to $93 range once again. My goal price may very well turn out to be too conservative. #5 on the list is absolutely satisfied. The sixth factor on my list referred to insider trading activity. The data below document a slew of insider buys on BG, made during November of 2018. Buyers included the firm's CEO and CFO, among others. The insiders' group couldn't resist buying at an average price of $62.30, about $6.58 per share above BG's Jan. 13, 2019, price. They comitted almost $62 million of their own cash that month. That's a very strong show of confidence from the people that best know Bunge's true value. Insiders must hold for more than six months in order to keep any profits earned on disposition. In committing over $61 million they must think BG will trend much higher than $62.30 over the coming year or so. We can now buy well cheaper than they did. Management received buyout interest from both Archer Daniels Midland and British-based Glencore Plc. early in 2018. Rumor had it that those bids were in the $80 to $100 area. BG turned them down as inadequate. Now that Bunge has regressed in price, the company might be more amenable to accepting an offer if either one or both of those suitors are still interested. Bunge is now bargained-priced, based on P/E. Its yield has never been higher. EPS are growing. Rational fair value is at least 30% to 35% above the current price. Value Line's 2021 - 2023 projected target price for BG range runs from $90 to $135. Option writers can nibble at the edges by selling some Jan. 17, 2020 expiration date puts at strikes from $57.50 to $65. Worst-case, forced purchase prices, with BG @ $55.72, dropped to between $49.50 and $52.10. Jan. 2021 expiration date options are available for trading as well. Future stock market action can never be guaranteed. We can know for sure, though, that owning Bunge near the $52 mark would have been a winning position more than 95% of the time during the entire previous half-decade. Buy some BG shares, sell some puts or consider doing both.

Put the Odds in Your Favor With Bunge

The stock's low point in December was almost certainly Bunge's latest and most fabulous entry point.

Columnist Conversation

After Its Own M&A Spree, Could Salesforce Itself Be Bought?

$SPX updated

Rolling Down Puts

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.