At last look, Bunge Limited (BG: sentiment, chart, options) was off more than 2%, as the Bermuda-based company was hit with a downgrade by Merrill Lynch this morning. Specifically, the brokerage firm lowered its rating from "neutral" to "underperform."
I cannot say that the downgrade surprised me. From a technical standpoint, the stock is down more than 71% since its June high of $127.64. Furthermore, the stock has trailed the S&P 500 Index (SPX) by more than 23% during the past 60 trading days.
What's more, the security is seeing resistance from its 10-week moving average, as it has been consolidating along the 40 region. This trendline could help pressure the equity lower, as BG has not closed above it since the end of June.
Despite the stock's less-than-stellar performance of late, analysts are sitting firmly in the bulls' camp. According to Zacks, the fertilizer maker harbors 4 "buy" or better ratings, compared to just 2 "hold" recommendations and not a single "sell" suggestion. Additionally, Thomson Financial lists that the stock's average 12-month price target is docked at $60.43, a premium of 52% to Thursday's closing price. If the stock continues to decline, it could fall victim to price-target reductions and/or additional downgrades.
Short-term option players are also optimistic. In fact, BG's Schaeffer's put/call open interest ratio (SOIR) stands at 0.72, which indicates that calls outnumber puts among options slated to expire within 3 months. Also, this ratio is ranked lower than 78% of all other readings taken during the past year, meaning that short-term option players have been more bullishly aligned less than one-fourth of the time during the past year. Furthermore, BG's 10-day call/put ratio on the International Securities Exchange (ISE) comes in at 1.05, pointing to investors' recent affinity for calls over puts.
However, on the other side, short sellers have jumped on this plunging stock. These bears have sold short more than 14.4 million shares, accounting for 12% of the company's float. Normally, this large amount of short interest would interest me, because I would see potential for the stock to rally, as the short sellers bought back their positions. However, in this case, I am actually going to argue the opposite. This equity would need to rally quite a bit to spook these short sellers into buying back the stock they sold short. In fact, it is more likely that these short sellers would add to their winning positions, rather than close them out. This could push the security even lower.
In conclusion, followers of Bunge should be wary. The stock has tumbled, yet sentiment remains optimistic. If the security fails to make any upward progress on the charts, it could see a switch in sentiment. From a contrarian perspective, the high amount of optimism, combined with the declining price action, has bearish implications.
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