Too Bullish on Bananas?

04/20/2010 11:30 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says Chiquita Brands is struggling to keep its share price rising amid volatile pricing.

Since the European Union removed a quota system for banana imports in 2005, Chiquita Brands International (NYSE: CQB) has struggled fundamentally, notes The Wall Street Journal’s Heard on the Street column ("Chiquita's Fruitful Strategy," April 6th).

However, the company has made several improvements in its return path toward peak levels of annual profit, including trimming unprofitable buyers and implementing a fuel surcharge to cover shipping costs.

However, the company's outlook remains uncertain, especially considering the volatile nature of banana prices in Europe, "where auctions occur weekly," says the Journal. Finally, CQB shares compare favorably with the competition, trading at "just seven times 2010 consensus earnings, compared with about eight times for Dole Food (NYSE: DOLE) and Fresh Del Monte Produce (NYSE: FDP)." In conclusion, the author believes that "fears of another blowup look overdone."

There is some fear in CQB's sentiment backdrop, but it isn't emanating from the brokerage community. In fact, five of the six analysts following the shares rate them a Buy or better, according to Zacks Investment Research.

What's more, Thomson Reuters reports that the average 12-month price target for CQB rests at $21.75 per share, a premium of more than 34% to the stock's Monday close [just above $16] per share. This configuration leaves CQB vulnerable to potential downgrades or price-target cuts should the company fail to live up to expectations.

The shares are down more than 10% in 2010, and have underperformed the Standard & Poor’s 500 Index on a relative-strength basis [recently]. What's more, the shares have pulled back sharply from their mid-December 2009 peak near $19.50 per share, placing CQB back below resistance at its ten- and 20-week moving averages. The shares are challenging the latter of these trend lines for dominance, and a rejection here could perpetuate the equity's reversal.

On the sentiment front, options traders are entrenched in short-term put positions, [but] data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) points toward a rise in optimism. This rising optimism amid the equity's recent decline has bearish implications from a contrarian standpoint.

Finally, short interest [recently] declined by more than 21%, but CQB has made very little headway despite the added buying pressure. Additionally, if the security is rejected once again by technical resistance, we could see these short sellers renew their bearish bets, potentially creating an influx of selling pressure.

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