Shares of energy crop developer Ceres (NASDAQ: CERE) surged more than 100% from the opening bell Monday to early trading on Thursday. In fact, over one-third of the total outstanding shares traded hands on Thursday. Even with the move the company is trading for "only" $100 million. With some of the biggest names in industrial biotech on its side -- such as Syngenta (NYSE: SYT), Petrobras, Amyris, Valero, Novozymes, Gruppo M&G, and Mascoma, to name a few -- this must be a good buy right? Not so fast.
What does Ceres do?
Ceres mines and manipulates the genomes of energy crops such as sweet sorghum and switchgrass to increase drought tolerance, biomass yield, and salt tolerability. Essentially, it has a similar business model as Syngenta and Monsanto (MON +0.00%), just for energy crops. Syngenta has actually licensed Ceres' bioinformatics software since 2008 to develop its own crops. In return, Syngenta has upgraded the capability of the computer program. Meanwhile, Monsanto and Ceres tangled up in 2002 to identify and develop engineered row crops such as corn and soybeans. Those payments now are a distant memory.
I was once an intern shoved into a similar chemical closet. This one houses thousands of experimental plants for Ceres. Source: Ceres
The similarities to Syngenta and Monsanto do not mean Ceres is worthy of investment, though. In fact, I think it could be a dangerous trap for just that reason. This latest pop is particularly worrisome to me. So what actually happened?
Why you shouldn't be a buyer
Did the company announce a major development? Nope, its last press release occurred on Jan. 8, 2013. Perhaps a big insider made a big purchase? Nope -- its last update to the SEC occurred on April 11, 2013. So what would cause this developmental stage to climb so rapidly? I can only come up with three possible scenarios:
- A potential buyout: Nothing is worse than speculating about a buyout, but I suppose a bigger player could go after the 100 issued and 210 pending patents held by Ceres -- more than many industrial biotech companies. This is just a guess to explain the massive share movement, and every day that passes without an announcement makes this less and less likely.
- Momentum trades: We at The Motley Fool think technical trading is hogwash, but if that's your game all power to you. I couldn't tell you what shape the stock chart took leading into the run-up (a dancing dragon trail, perhaps?) -- and I don't really care. If momentum traders are piling in to try to make a quick profit, then they will be out just as quickly. Don't be caught holding the bag.
- Confusion: This is, unfortunately, my best guess for the move. Several news outlets have linked this story to the ticker page of Ceres in recent days. I'll be happy to inform people that Ceres Ag -- the Toronto-based company building a commodity logistics hub -- is not the same company as the energy crop company hip-deep in agricultural fields in Brazil. If you bought shares due to this confusion, go to your brokerage account and sell your shares now before you finish reading the article. I'll wait.
The take-home is that nothing actually happened to warrant this move. If the possible link to Toronto-based Ceres Ag isn't enough to scare you away, consider that even with all of the potential behind Ceres it won't be completing major sales of seeds until December of this year. The company raked in just $5.4 million in revenue in its latest fiscal year (ended August 2012) and lost over $29 million.
I can certainly see the potential of its business model, especially if performance metrics can be believed, but I just don't see the point of rushing into a position now. It will take years for Ceres to build a respectable business. I can wait until the prospects warrant much less risk. If a buyout isn't in store and this is just a momentum trade, then there is absolutely nothing that will keep the valuation at $100 million. I'm on the sidelines for this one. In fact, I'm walking to the concession stand until there is actually something to talk about.
