I love cheap stocks. The problem is they tend to get cheaper unless the underlying issues creating such cheapness aren’t fixed.

Bunge is a great example. Seemingly cheap with improving fundamentals underneath, the thing has no place to go but up. After all, people need to eat and more Chinese mouths are joining the Western food chain – how can things not get better for BG?

For processors in general and BG specifically, such growth in actual grain consumption is not keeping pace with the expectations of investors. While this failing “grain growth” idea has not taken a whack out of fertilizers yet, investors are keenly focused on it with regard to ADM and BG. Hence, BG trades around tangible book.

Looking at the two and ignoring the absurd multiples afforded fert stocks, one wonders why ADM trades 1.5x-2.0x BG. There are as many “reasons” floated as sell-siders covering these things. My personal opinion is that it is related to its trading desk. Whatever, it all circles back to consistency in earnings and BG has a horrific record. When BG can convince investors ROIC > WACC for more than one or two quarters in a row, the stock should respond positively. Until then, trade the thing around a mildly increasing tangible book.

The upcoming Q1 conference call does not sound like a quarter to help inspire such confidence. It looks like ag processing margins are coming down, and the recently acquired sugar business ain’t doing so hot this quarter or next. Earnings near $1 for the quarter won’t meaningfully move the tangible book needle when the stock trades above $70. This is all largely reflected in Consensus already, which means folks already know ROIC < WACC for the upcoming quarter.

Regardless of what happens on the call, the back half of the year should be very interesting. While implied caution abounds for the upcoming call, everyone and their brother thinks this thing does well in Q3 and Q4 since full year 2011 estimates continue going higher…even with a supposedly bad Q1 coming up. Worse for the stock, mgmt no longer gives full year EPS guidance. From one perspective this is a good thing since past quarters saw stupid revisions to guidance such that mgmt appeared out of control. The other perspective says that without specific guidance, investors are left to their own imaginations and that is never a good thing if a company is popping off with a bad print.

Unfortunately, I have seen this movie before. BG has a bad habit of screwing things up. With caution being ignored for Q1 and boundless optimism building for 2H, watch this thing get ripped to shreds if mgmt cannot find some way to confirm the recent increases to 2011 EPS estimates. The sell off will last for at least a week.

I am obviously inclined short into the call. However, with BG and ADM at multiyear highs and CPO – the despot it is – marking new all-time highs, there is something here that smells faintly of POT’s 2Q10 report. I was short into that report and POT did indeed disappoint…but the stock went up anyway. POT was by no means cheap at the time, but BG is cheap on a book basis. If this ex-hedgie darling gets a whiff of interest, there is a lot of valuation that needs to fill in. So, like many others this season, I prefer to wait for the call. My oddball strategy with BG is a repeat of the past: wait for a selloff toward $60 and then sell puts – but only if the market is in the business of tanking as well so I can take nice advantage of selling volatility at the same time.

Tweet