Archer Daniels Continues To Lead, But For How Long?

Archer Daniels Midland Company ADM shares have been in a beautiful uptrend ever since making its low in late 2008 at $13.53, posting over a 300 percent return since. The nearly unabated upside move since the November 2012 low has been stunning for the stock of a company like Archer Daniels.

When stocks go on runs like this and get overbought, one of two things happens: 1) the company's fundamentals end up vindicating the loyal bulls, or 2) the stock comes back down to earth to make the valuations more attractive. Which will it be for ADM? Let's take a look.

What The Bulls See

• A nice 2.2 percent dividend yield.
• Still reasonable valuation metrics: An estimated enterprise value of $37.16 billion versus the market capitalization of $32.58 billion, a price-to-sales ratio of 0.42 and a price-to-book ratio of 1.76.
• Strong management effectiveness metrics: A return-on-assets of 4.79 percent and a return-on-equity of 12.77 percent.
• Strong levered free cash flow of $4.12 billion annually
• An acceptable balance sheet situation: Cash of $1.3 billion versus total debt of $6.44 billion, which isn't great, but the debt-to-equity ratio of 34.34 percent is good, and the current ratio comes in strong at 1.68.

What The Bears See

• A P/E ratio of 15 versus revenue and EPS growth for next year of only 2.3 percent and 8.1 percent.
• Very thin net profit margins of 3.17 percent.

The Technical Outlook

Technicians note the bull market that ADM shares have been enjoying ever since the 2008 lows in general and since the 2012 pivot low in particular. However, they note that the remaining upside may be somewhat limited.

The upper edge of the long-term uptrend channel looms as the potential upside stopping point at around $56.50 (from $52.52 as of Tuesday's close). However, prior to that level becoming the next target, the first resistance at the previous high of $52.91 must be conquered. Once the stock finally does peak, the first support will be the recent pivot low of $45.15 and the next support will be approximately $40.

Overall…

Archer Daniels may have a bit more upside left to enjoy before any major call for a top can be made in the stock. The company's strong balance sheet and reasonable valuations do nothing to add to the bearish side of the argument. That leaves them with only "overbought" and a somewhat high PEG ratio as their arguments. Sometimes, "overbought" becomes "very overbought" and PEG ratios can get stretched even farther than they might be currently.

Until more clear signs appear that a top in ADM shares is in place, the technicians would urge shareholders to remain shareholders.