Too Much Corn Starch in This Stock?

10/07/2010 9:29 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says shares of agricultural giant Archer Daniels Midland have soared, making this stock perhaps a bit too popular.

[A recent article in the Weekday Trader column on Barron’—“ADM Has Upside Grains” September 29th (subscription required)]—takes a bullish look at Archer Daniels Midland (NYSE: ADM).

The agricultural commodities powerhouse has prospered following poor weather in Europe and Canada that pushed up prices for corn and wheat. [The author] believes the security is relatively cheap, trading at only 10.6x forward earnings, below the 11.4x figure for competitor Bunge (NYSE: BG).

Analysts also look for ADM's grain storage and export businesses to benefit from elevated grain prices. In addition, two pending regulatory decisions on ethanol blends for cars could be catalysts over the next few months.

"We think that this is a tremendous long-term holding," says D. Tysen Nutt Jr., a senior portfolio manager at Delaware Investments, which owns ADM shares. "It's a great company at a reasonable valuation that is going to be part of this movement towards greater demand for food as economies and populations grow."

Options players are optimistic toward ADM. The International Securities Exchange (ISE) reports that 9.5 calls were purchased to open for every one put purchased to open during [ten consecutive recent] trading sessions.

What's more, the Schaeffer's put/call open interest ratio for ADM [recently came] in at 0.36, as calls nearly triple puts among options slated to expire in less than three months. This ratio is lower than 97% of all those taken during the past 12 months.

In other words, short-term options players have been more optimistically aligned toward the shares only 3% of the time during the past year.

[Finally,]  Wall Street is also optimistic. According to Zacks Investment Research, the stock has earned nine Buy ratings and one Hold, leaving ample room for downgrades.

Technically speaking, the shares are up more than 5% since the beginning of the year. More recently, the stock has staged an impressive rally along the support of its ten- and 20-day moving averages since early June.

Considering the equity's performance during the past couple of months, this optimism among options players and analysts is to be expected.

(ADM closed just below $32.50 Wednesday, not far off its 52-week high—Editor.)

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