The inside scoop on why I sold my last remaining CAPS multi-bagger
There are two industries that I have more inside knowledge of than any other, the auto industry and agriculture. My contacts in the ag sector told me something earlier this week that caused me to close my last remaining CAPS multi-bagger, Monsanto.
First for some background on why I originally green thumbed MON back in September of 2006. Here was the pitch that I wrote for it back then:
"Ethanol is making huge headlines, but the ethanol producers are already played out. The way to play this market is to buy shares in companies that are going to benefit. Corn use for ethanol in 12 months will reach 3.0 billion bushels equal to 27% of U.S. production. Corn prices are racing higher for good reason. Short of buying corn futures where are the plays? Buy stocks in companies that benefit from high corn prices. Monsanto has the largest market share of seed corn and the originator of GMO seed. Monsanto is quickly gaining market share. In addition I estimate corn acres need to increase 7 million acres next spring to keep up with the demand for ethanol. An increase of 7 million acres is plus 9%. Monsanto is the market leader in seed corn and demand is growing 9% annually. Monsanto is well above 52 its week low but it has further to go. Buy and hold through the summer of 2007."
Income growth in emerging markets and the massive consumption of corn caused by the government's ethanol mandates cause the prices of grains to skyrocket over the past several years. This caused the prices of everything from farm equipment to fertilizer to seed to soar. Farmers were able to tolerate these higher input costs because the prices of grains kept going up. Well, the prices of grains, along with most other commodities have imploded lately. Take a look:
You get the idea...
Earlier this week, I decided to sell Monsanto and put the 118 CAPS points that I generated from it in the bank. Why? You will probably never see Monsanto issue a press release about this, and probably won't even see an article on the subject, but quietly the company is beginning to tell suppliers and clients that it is going to be forced to begin to lower seed prices. Farmers are getting crushed by falling grain prices and the tight credit markets. They can no longer afford expensive inputs. If MON has to lower prices, it is very likely that it will miss analysts' earnings estimates. It is very likely that a company sporting a P/E of 25 will get punished severely for missing estimates in the midst of a bear market.
It is sad selling my only remaining two bagger, but unfortunately in this sort of market environment I suspect that the only two baggers that I will see for a loooong time will be at the checkout counter of my local grocery store.