Category Archives: MON

“Scary” 1929 Chart Says Little About the Future

On February 11, 2014, Mark Hulbert of MarketWatch.com posted an article titled “Scary 1929 Market Chart Gains Traction (found here)”.  In the article, Hulbert suggests that the critics of the chart, which shows a parallel between the current market action since July 2012 and 1928-1929, are running out of explanations as to why the chart doesn’t have merit.

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One aspect missing from the Hulbert article is what it takes to get from the most recent high of 16,588 to the 1,658 level on the Dow Jones Industrial Average.  In order to lose -89% in value, the Dow would need to decline first to 15k, 14k, 13k etc.  Leaving out these important hurdles on the downside ignores a wide swath of goings-on that needs to occur in between now and the doomsday low.  To fill the void that is unexamined by the Hulbert article, we’re going to review the various ways that the Dow Jones Industrial Average could decline to new lows.

Before offering our downside take on the market, we’d like to refer you to some basic issues that are mandatory to understanding how the stock market decline from 1929 was an anomaly, at best.  In previous work on the topic, we’ve addressed reasons why the 1929 stock market decline of -89% had more to do with reshuffling of the index by replacing stocks that had fallen significantly with new stocks that had appeared strong but were on the cusp of major declines.  Once the new stocks were added to the index they crashed hard while the stocks that were dropped from the index were at the beginning stages of recovery (2009 article found here).

In another piece, we outlined the fact that the decline of 1929 was followed by a recovery that was much faster than most investors know.  Our theory is that the multiple changes to the index artificially suppress the index on the way down and on the way up.  This resulted in the Dow taking 25 years to achieve breakeven status with 1929.  However, stocks that were not part of the index can be seen to achieve breakeven status on average by 1937.  One of our favorite examples is found in the chart of Monsanto Corp. below (2010 article found here).

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Monsanto (MON) Chart: 1929 to 1937

Below is an excerpt from a 1937 issue of Barron’s showing the price history of Monsanto (MON) from 1929 to 1937. The high price set in 1929 at $40 was marked down over 75% in 1932. Subsequent price movement brought the stock of Monsanto back to the 1929 high by the end of year 1933. By late 1935, Monsanto (MON) was just short of $100 a share.
We’re not totally clear about the specific dynamics that allowed for the price rise of MON at the market bottom. However, prior experience with the market decline from 2007 to 2009 and research of markets like 1837, 1857, 1866, 1873, 1884, 1893, 1907, 1929 and 1973 has shown us that the reaction to the devastating forces of stock price deflation is nearly equal in magnitude and timing.
We found this chart in line with our previous articles titled “Dow Jones’ Decline Largely Impacted by Index Changes” and “After the Crash, Recovery was Faster Than Most People Think” on the topic that the decline and recovery of many stocks was much quicker than most would imagine after 1929. In the case of Monsanto, the stock is shown to have recovered much quicker than previously indicated.

Gaining More by Limiting Our Gains

One of the biggest challenges to buying and holding a stock for the long term is the wait through thick and thin for the expectations of a particular stock to materialize. In a process of elimination, the New Low Observer team has narrowed down the steps to determining quality stocks by relegating it to those that have increased their dividend every year for at least 10 years in a row. Furthermore, we only seek out those high quality dividend paying stocks, as well as Nasdaq 100 index constituents, when the companies are within 20% of the 1-year low. Having these requirements allows us to select quality companies at (potentially) ideal times to invest.
However, once we have decided on the company that we're interested in investing and we've committed money to, we are still at the whims of "Mr. Market." Although it might seem surprising to some, we are incredibly risk averse and always try to avoid losses whenever we can. We are so risk averse that we have a general rule that if the investment in a particular stock exceeds the gains of the market over the last 100, 50, 25, or 10 years on an annual basis (after expenses) then we tend to sell that stock to seek alternative investment opportunities. If nothing else, we secure the exceptional gains and bide our time until the next "undervalued" opportunity arrives.While the buy-and-hold crowd cries foul at the thought that we're speculating rather than investing when buying and selling high quality stocks at arguably undervalued prices, we have noticed a pattern that keeps emerging from our strategy that sets apart our approach from merely speculating. One of the best recent examples of the value in our investment philosophy is the case of Meridian Biosciences (VIVO).
On March 17, 2010, as the Dow Industrials and Dow Transportation Average were confirming the Dow Theory trend to the upside, Meridian Biosciences (VIVO) was dropping like a rock on news that the future earnings would have to be revised lower. In one fell swoop, Meridian Biosciences (VIVO) erased 9 months of hard earned gains in the stock price. I say 9 months because after our recommendation to sell VIVO, the stock increased in value an additional 27% in 3 months at the peak in September 2009.
At the time of our sell recommendation, Meridian Biosciences had risen 11.75% from our Research Recommendation on March 26, 2009. We were content in our gains and smug at being so smart at selling while the going was good. However, we watched, in almost horror, as the stock continued to climb higher going from our sell point of $20.35 all the way up to $26. We began to wonder if selling a company that we were convinced was of the highest quality was the best choice. After all, Meridian Biosciences (VIVO) is one of the only Dividend Achievers to match the gains of Google (GOOG) on a percentage basis from the date of Google's (GOOG) IPO to the peak in late 2007/early 2008.
With a tinge of regret we moved on hoping that our next investment would make up for our blunder of selling VIVO at such a cheap price. In the nine months since our sell recommendation of Meridian Biosciences (VIVO) we've made eight Investment Observations that were followed by Sell Recommendations. Below are the stocks we mentioned and the percentage gains that were secured since our sell recommendation of VIVO on June 12, 2009:
  • Cardinal Health (CAH) +23%
  • Abbott Labs (ABT) +16.80%
  • SuperValu (SVU) +11.87%
  • Nor'wst Nat (NWN) +10.53%
  • AquaAmer. (WTR) +10%
  • Cephalon (CEPH) +13.41%
  • Mattson (MTSN) +24%
  • Monsanto (MON) +22%
With the reduction of earnings estimates and the subsequent collapse of Meridian Biosciences (VIVO), the stock has fallen below the level of the original sell recommendation that was given on June 12, 2009. In addition, we've highlighted eight companies that have provided double digit returns in a complete buy and sell cycle all within a nine month period. The chart below illustrates the recommendation dates in green and the sell dates in red with the post-collapse price in yellow.
Today the New Low Observer team breathes a sigh of relief, not in the lose that has afflicted current Meridian Biosciences shareholders but based on the fact that we stayed the course with our investment philosophy which provided gains that, to this point, have gone beyond our expectations by actually limiting how much we are willing to accept on the upside.The lesson that should be learned about Meridian Biosciences is that although the price is nearly the same as a year ago doesn't mean that there was no movement or activity. In fact, the stock went up as much as 44% in 5 months. This is the hard lesson that most buy-and-hold investors should have learned about where the major indexes have gone over the last 10 years. Within all the drama that occured since 2000, many opportunies presented themselves but may have never been realized if holding for the long-term was the only investment strategy. For most investors, the real challenge becomes whether or not to sell a stock after exceptional gains.
Our Current Take on Meridian Biosciences
In our sell recommendation of Meridian Biosciences at the $20.35 level, we said that VIVO would easily go to the $23.33. Since the peak in the price at $26.20 in September 2009 and the recent decline to $19.60, Dow Theory indicates that for this stock, the upside move should take the price at least to the $23 level before going back to the old high of $26.20 or back down to the $19 range. Our expectation that a reaction of 11% to 13% upside move would not be unusual.For those who are interested in justifications of Meridian Biosciences (VIVO) as an investment candidate (since the negative news is already out), there are several compelling factors to watch for.
First and foremost is the recent confirmation of the bullish move of the stock market according to Dow’s Theory. This gives the investor that chance to make mistakes without paying a hefty price. More specific to Meridian Biosciences (VIVO) is the fact that the company is selling 16% below the 8-year average price-to-earnings ratio according to Morningstar.com. VIVO is also selling 3% below the average price-to-cash flow ratio over the last 10 years. Bolstering the case for VIVO is the fact that the company carries little or no debt. We will be watching Meridian Biosciences (VIVO) closely for any indication that the stock will decline from the current level. Our hope, as it always is, is to buy the stock at a much lower price and take reasonable gains in the shortest period of time possible. It is our hope that others can see the value of our approach of taking gains that exceed the historical average annual return and seeking alternative investment opportunities whether it is in cash or another quality stock that is at or near a new low.
  • Don't know the historical average annual gains for 100, 50 or 10 years. Go to Moneychimp.com's CAGR of the Stock Market Calculator. Pick just about any time frame and see what you've been missing (even on an inflation adjusted basis).
  • Want more info about the strategy mentioned above, then go to our article title "When Timing Meets Opportunity" on SeekingAlpha.com. The article was posted in July of 2009 and has more relevancy than ever before.
  • Our article titled "Seeking Fair Profits" outlines Charles H. Dow's philosophy of fair expectations when investing in the stock market. Charles Dow was the co-founder of the Wall Street Journal and the Dow Jones Indexes.
Tell a friend about us. Thank you.

Sell Monsanto (MON) at the Market

Again, it is just our luck that Monsanto (MON) has done exactly what we had anticipated. On October 30th we issued a Speculation Observation which indicated that MON should be considered for short term gains. However, our upside target price was around $76, in this regard we were woefully incorrect.

MON has managed to climb to the level of $83.38 as of December 9th. Anyone who was bold enough to take our observation to heart would have a 22% gain on their hands. It is strongly recommend that a mental trailing stop is instituted to ensure retention of the gains. Personally, we would sell the stock and wait for new opportunities. Touc.

Speculative Observation: Monsanto (MON)

According to Google Finance, "Monsanto Company along with its subsidiaries, is a worldwide provider of agricultural products for farmers. The Company’s seeds, biotechnology trait products, and herbicides provide farmers with solutions to produce foods for consumers and feed for animals. The Company operates in two segments: Seeds and Genomics, and Agricultural Productivity."

Although Monsanto (MON) isn't a Dividend Achiever or a member of the Nasdaq 100, the company has a solid history and provides investors with an exceptional opportunity.

MON is currently trading within 5.85% of the the 52-week low. What is significant about the low that MON is approaching is that it is close to the November 2008 low. This is a critical support level for the stock which could indicate that a major reversal is ahead.

According to Dow Theory, MON is projected to decline to the following levels:

  • $52.17
  • $37.08
  • $21.99
  • $6.90
Each of the downside targets, based on Dow Theory, should provide some kind of support level. Interestingly, MON's 50% level, based on the decline from the prior peak and the July 2002 low, is at $67.90. This means that either the stock declines much further or the stock rebounds from here.

According to Value Investment Survey dated August 2009, MON typically reverts to a level of 17 times cashflow. Full year 2008 cash flow was $4.50 per share. This equals a price of $76.50 that the shares should revert to at some point in the future. Value Line seems to believe that, for 2009, MON should achieve cash flow of $5.55 per share which implies a mean price of $94.35. I would opt for the lower price just to play it safe. In the period from 1981 to 1996, Value Line had a smaller mean price to cash flow (13x). This means that as time has gone on since 81' to 96' MON has managed to improve their price to cash flow figures.

With MON trading at 11% below the historical mean value, as well as being within 6% of the low, this is a good opportunity to get your research in as the share price declines. Focus on the downside risk and good luck. Touc.

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