Is Monsanto (MON) about to be taken out? Wall Street seems to think so, as shares of the agriculture specialist soared almost 12% Thursday, reaching a high of $100.85 on reports that Germany's Bayer (BAYRY) is positioning itself to buy the St. Louis-based company for an estimated $65 billion.
Monsanto, the world's largest manufacturer of seeds for planting, would make a great addition to Bayer, which has its own seed and crop portfolio.
Given the recent stance by federal regulators, who have blocked several large deals, it's risky to trade either Monsanto or Bayer stock based solely on the M&A rumor. And even if either company were to publicly state their interest in a deal, tons of hurdles and restructuring concessions by both companies would have to be met before they receive regulatory approval. Even after approval, execution risks remain.
Now's the time to take profits in Monsanto stock, which closed Thursday at $97.92, soaring 8.39%.
From just one day's rumor, Monsanto stock -- which is down 0.61% year to date -- has almost erased all of its 2016 losses. Compare that to a 1% rise in the S&P 500 index.
Based on Thursday's closing price, Monsanto stock has fallen almost 16% in the past 12 months and is now down about 19.13% below its 52-week high of $121.09. Prior to Thursday, Monsanto stock was about 10 percentage points below the threshold for bearish territory.
Take a look at the chart below, courtesy of TradingView.
There are several ways to asses where Monsanto stock is likely to go next. The first area to consider is the solid red arrow, which is positioned around $95.98, or about 2% below Thursday's close. If the stock falls back to that level, it would mean the shares are back in bearish territory, 20% below the 52-week high. Prior to the M&A rumor, the stock had languished in that area, significantly underperforming the S&P 500 index.
The second area to watch is the 8% gap the stock has now created, which could be filled on any sudden change in M&A tone. This would represent an 8% decline from Thursday's close. Finally, when considering the stock's resistance area (orange arrow) at around $99.60 to $100, the stock will see tons of profit taking if or when the shares reach that mark.
In addition, the stock's average analyst 12-month price target is $98.50, just 0.59% above where it is now. That makes holding less worthwhile.
How to execute the trade: Sell Monsanto Friday morning at $97. Then use the profits to buy any other stock with longer-term growth potential, not one moving purely on M&A speculation.