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Smart Investors Need To Dump This 'Comeback Stock' Before It's Too Late

 April 12, 2012 11:28 AM

As Warren Buffett, George Soros and so many others have said, you need to swim against the tide, finding values where others miss and shunning stocks that are loved by all.

Back in the summer of 2010, agriculture firm Monsanto (NYSE: MON) was simply loathed. Low-cost Chinese competitors were eating into its Round-Up herbicide franchise, farmers were up in arms over a restrictive seed usage policy (which made its way to a story on 60 Minutes), the company was headed for a 10% drop in annual sales and analysts were uniformly tepid on the stock's prospects.

As I noted back then, Monsanto's $1 billion in annual research and development spending would soon make the company relevant once again. Indeed, in the subsequent fiscal year (ended August 2011), Monsanto's sales rose 13% to $11.8 billion and earnings per share (EPS) shot up a heady 49% to $2.96.

[Related -Gold hasn’t lost its allure in my portfolio]


Yet as you dig into just-released quarterly results and start to look at where Monsanto may be headed next, you may find reasons to sell. The stock's impressive rebound has set up a clear disconnect between a fairly high valuation and slowing growth. That's what happened to major drug stocks a decade ago and may be happening to Monsanto soon.

Another good quarter
Monsanto just announced fiscal second-quarter results that once again topped forecasts, this time with an EPS of $2.28 (roughly 7% ahead of projections). Almost all of the upside was attributed to stronger-than-expected demand for corn seeds, as farmers got an early start thanks to very balmy weather this winter. Some of that strength may also extend into the current quarter as spring plantings are underway, but many analysts decided to leave their full-year forecasts intact.

The pull-in for the planting season is expected draw demand from the summer quarter. Despite beating second-quarter estimates by $0.16, analysts have boosted their fiscal (August) 2012 full-year estimates by just three cents to $3.54.

It's the view beyond 2012 that becomes more concerning.

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