Here’s Why Monsanto Is Too Risky at Its Current Valuation

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On Wednesday morning, the world’s largest seed and pesticide producer, Monsanto (NYSE:MON), reported earnings and guidance that sent shares flying 5 percent to multi-year highs. But while the market is bullish, I would use this optimism and positive price action to take profits, despite my generally positive outlook for agriculture stocks. Here’s why.

First, the company trades at over 25 times earnings, which is an earnings multiple that requires growth in order to make sense. The company’s EPS figure actually declined from $1.68 per share to $1.62 per share for the third quarter. While the company has generally been growing its profits over the long run, it is showing signs of profit growth deceleration, which means it could be at or near an earnings peak, whereas many other agriculture stocks, such as those in the fertilizer space, are at or near earnings troughs.

Second, the stock looks like it is going to make a double top. The stock peaked out in 2008 at about $140 per share. After correcting through 2010, it has risen since, and now the shares are back at $127, or about 10 percent below this all-time high. I suspect that the company’s shares could reach this level before they correct in a big way back to the long term uptrend line, which is closer to $75 per share.