Bunge: Starting a Position Now Could Mean Long-Term Growth

Feb. 1.11 | About: Bunge Limited (BG)

In general there is reason to be long term bullish on Bunge (NYSE:BG). This is mostly from a strategic perspective as it provides exposure to two positive macro level trends via its core agribusiness and exposure to emerging markets. However, in the recent past not all of the Bunge story has been positive. Most notably it has been challenged to smoothly manage price volatility in its markets and has had some bumps in the road in the transition of its fertilizer business.

This situation has created a lot of unpredictability in financial results. For example, in the last four quarters earnings have missed or exceeded analyst estimates by a minimum of plus or minus 40%. This uncertainty can still be seen in this coming quarter's earnings estimates. Analysts' estimate for this quarter is $1.59 but with a range from $1.31 to $2.00. That means that there is really not a consensus estimate. No matter what the actual earnings number, such a wide range of estimates seems to make it likely that at least some of the analysts will be surprised.

In most situations, I feel it is prudent to wait for earnings announcements and then establish or adjust a position in the stock. This minimizes the risk of either getting caught by an earnings miss or a “sell on the news” pull back. However, in this case, if you are bullish on Bunge's long term prospects it seems that entering a position before the earnings might be prudent because

  • fundamentally - hopefully the core agribusiness will have done well given the macro environment

  • technically – the 50 dma at around $65 may act as a support level

  • expectations - hopefully the longer term forecasts will be easier to articulate than in the past and management will be better able to manage expectations, taking some uncertainty out of the forecasts.

I bought the first lot of a position at $67.50 on the pull back on Friday. It seemed prudent to protect against an earning misstep or emerging market volatility so I added a protective Feb $65 put. To make that insurance a little cheaper I expanded the option trade into a collar by selling a Feb $75 call. This collar cost $1. So the first lot of a position in Bundge is in the books at a cost of $68.50. Worse case is the stock falls below 50 dma and there is a 5 % loss. Best case, the stock soars and it is called away at $75 for a 9.5 % gain. Most likely the stock will stay in the $65 to $75 range past earnings. In which case the collar position can be removed or adjusted and a decision on acquiring a second lot can be made.

Update: Bunge is trading higher this morning, likely in sympathy with ADM's positive earnings call. That seems to positively re-enforce the thought of establishing a hedged position prior to earnings.

Disclosure: I am long BG.

Additional disclosure: This posting is for informational, educational and entertainment purposes only and should not be considered investment advice.