Controversial agricultural chemicals firm Monsanto Co. (MON) wants to take over your food supply, undoubtedly igniting fears amongst “go-green” activists and conspiracy theorists alike. Twice this year, Syngenta AG (SYT) has rejected Monsanto’s takeover bids, with the latest offer coming in at a cool $45 billion. Monsanto’s chief executive officer, Hugh Grant, made it clear Monsanto leaders view agricultural chemicals, a main strength for Syngenta, as a key part of Monsanto’s business going forward, with or without Syngenta.
But what about Syngenta as a stand-alone investment opportunity? Clearly, Monsanto values Syngenta’s expertise in the agro-chemical field, as its bid represents a 17% premium over Syngenta’s current market capitalization of $38 billion — a number that was substantially buoyed thanks to a 30% jump in the markets year-to-date.
Much of this lift came about because of Monsanto’s as of yet unrequited overtures but Syngenta is a fundamentally strong name in its own right. Its cash-to-debt ratio is 0.8, meaning that 80% of Syngenta’s long-term liabilities can be covered from its on-hand cash or cash equivalents. Total assets are greater than total liabilities, also by an 80% margin. In addition, annual revenue has increased over the past three years by an average of 3.2%.
What makes Syngenta a bit of a shaky investment outside of Monsanto executives is in its technical picture. SYT stock has a current beta of 0.9, but the range between its 52-week highs and lows is fairly wide, at a little over 67%. Much of this volatility is a result of a long-term broadening wedge formation, which typically results in chaotic market behavior.
A broadening wedge can be thought of as a reverse pennant formation. A pennant is essentially a consolidation pattern, where the highs and lows of an asset’s trading range are gradually funneled tighter and tighter into a focal point, or apex. On a technical chart, this pattern resembles a triangle. At the apex, the consolidation is resolved with either a breakout move or a breakdown. But in a broadening wedge, the trading pattern starts off at the apex, and gradually unwinds outward. This results in increasing rates of volatility — a condition that can net enormous profitability but only if the timing is just right.
But the other side of the coin is that SYT stock has exited the bearish implications of the broadening wedge. This does not necessarily mean that the sentiment will automatically shift to the bullish side, but we are entering into a clean slate. And in many circumstances, once a stock has brushed itself off from a significantly bearish pattern, it has a tendency of making up for lost time.
Will that be the case for Syngenta? It certainly appears that way. If anything, Monsanto executives are likely thinking that the third time’s the charm, and may up the ante — and the bidding war.