MON & DNA Report

DNA Beats, MON Disappoints, Yet Both Fall

By Bryan Bottarelli
Wednesday, October 11, 2006 9:52 AM EST
Wed, 11 Oct 2006 14:52:00 GMT

Dear Bottarelli Research Member,

As we begin today’s session, our two speculative call plays are coming under pressure. One of the moves is justified — while the other move is not justified. Let me explain.

This morning, Monsanto (MON – NYSE) reported that their forth quarter loss widened from a year ago, coming in at $144 million or -$0.27 versus -$0.23 this time last year. Although their profit more then doubled, jumping from $225 million to $689 million, Monsanto’s 2007 earnings expectation between $1.50 and $1.57 per share came in below expectations of $1.62 per share, which is subsequently dropping shares in today’s early trading. I feel this down-move is a completely justified given MON’s numbers, but I also feel that yesterday’s down-move was indeed due to an insider that leaked the poor earnings. Typically I like to sell calls leading up to their earnings announcements as speculators bid up the shares, but this MON leak ruined that game-plan. Either way, today’s move will put us out of our MON October 47.5 Calls (MON JW) for good.

On the flipside, Genentech (DNA – NYSE) reported stellar numbers. The San Francisco-based biotech reported earnings that beat Wall Street expectations by a full $0.08 cents per share and reported a 36% increases in revenue — good for a reported a whopping 58% rise in third-quarter net earnings.

Ironically, DNA is trading down in early market activity, something that simply seems off. Although sales of Lucentis, their treatment for blindness in the elderly, outpaced expectations, sales of Avastin, Herceptin and Rituxan came in as “unimpressive,” according to some experts. To me, that simply shows just how strong DNA is. Despite three of their top line drugs not getting the sales numbers some expected, they still beat expectations by a wide margin. I find that very impressive. Therefore, I may use subsequent DNA weakness to enter into some longer-term calls.

Now, if you’re a speculator holding the DNA October 85 Calls (DWN JQ), you still have the possibility of DNA jumping on FDA approval news later this week, so if you can bite down hard and hold the position, there’s a possibility that it could still pay off.

Here’s an important point: If MON and DNA are any indication of how Wall Street will be reacting to Q3 earnings, then we’re in for quite a brutal month. MON disappoints, DNA beats, but the ending result is that each stock still moves lower. If that mentality continues, then by bearish thesis (dubbed “Red October”) will truly come to pass. And of course, that means we overweight the ledger with put options. I’ll be on the look-out for more put possibilities given these new developments, so stay tuned. Until then…

Lock and load

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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