Shares of energy crop developer Ceres Inc (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 AG (ADR) (NYSE:SYT), Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), Amyris Inc (NASDAQ:AMRS), Valero Energy Corporation (NYSE:VLO), 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 Inc (NASDAQ:CERE) 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 AG (ADR) (NYSE:SYT) and Monsanto Company (NYSE:MON), just for energy crops. Syngenta AG (ADR) (NYSE:SYT) has actually licensed Ceres Inc (NASDAQ:CERE)’ bioinformatics software since 2008 to develop its own crops. In return, Syngenta AG (ADR) (NYSE:SYT) has upgraded the capability of the computer program. Meanwhile, Monsanto Company (NYSE:MON) and Ceres Inc (NASDAQ:CERE) tangled up in 2002 to identify and develop engineered row crops such as corn and soybeans. Those payments now are a distant memory.
The similarities to Syngenta AG (ADR) (NYSE:SYT) and Monsanto Company (NYSE:MON) do not mean Ceres Inc (NASDAQ:CERE) 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 Inc (NASDAQ:CERE)– 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.