Name That Trade: $DDD Needs Support

by Dan March 20, 2014 11:17 am • Commentary

This morning 3D printing company XONE pre-announced worse than expected sales for the current quarter, sending its shares down 8.5%, and the shares of larger competitor DDD down about 3.5%.  While we have acknowledged on a few occasions in this space that 3D printing is clearly a revolutionary technology and has the potential to be very disruptive to many existing technologies and processes, we have not been fans of the sector’s price action and valuation (Sagging DDDs from Jan15th and Three Dementia from Feb 25th).

Both stocks have gotten crushed this year, losing about a third of their market caps, signaling an investor shift from shear euphoria in 2013 to one of near desperation in 2014.

While the price action has been less than stellar of late, it also for the moment incorporates a bit of bad news.  I think it is safe to say that investors’ expectations have come down dramatically, and with XONE’s warning today, its likely a forgone conclusion that it’s competitors will likely follow suit in the next month.  Since the opening, XONE and DDD attempted to fill in the opening gap lower but both failed and now sit closer to the lows than the highs.

As for DDD, the stock has, for now successfully held a fairly important support level at $60, the very level that it had broken out from back in early November and registered 50% gains to its highs in January.

[caption id="attachment_37764" align="aligncenter" width="589"]DDD 6 month chart from Bloomberg DDD 6 month chart from Bloomberg[/caption]

For those who think that negative sentiment in the space is a bit overdone, the technical set up could suggest a bounce back to 70.  In that case, it makes sense to look to do so with defined risk given the potential for a negative tape bomb at any moment.

Looking at 30 day at-the-money implied vol in DDD, the price of options seem to be fair, despite being a 50 vol!  The blue line below shows implied vol, the price of options, while the white line shows the actual movement of DDD, the realized.  What is obvious is that as the movement has settled down, so have the prices of options.  If you were of the belief that the movement was to pick up, then the prices of options could be perceived as cheap and an optimal way to express a directional view with defined risk.

[caption id="attachment_37765" align="aligncenter" width="589"]DDD 1 year chart of 30 day at the money implied vol (blue) vs realized (white) from Bloomberg DDD 1 year chart of 30 day at the money implied vol (blue) vs realized (white) from Bloomberg[/caption]

With the stock now hovering just above $60, I want to wait and see how it responds on a break of $60, I would be more inclined to play for a reversal and a bounce then trying to press the stock back to the $50 support level.

While it is generally not a great idea to buy out of the money premium in a 50 vol name, it looks like the only way to play with defined risk, as long butterflies would be attempting to thread the needle a bit too much.

I am going to wait at the moment, but if I were to play for a bounce with the stock around $60 I would look to buy the April 65/70 call spread for about $1.00.  Risking 1 to make up to 4 if the stock were to head back to obvious near term resistance.

We are definitely going to take our time on this one as we are not fans of valuation and the technical situation could be dicey at best, but with 25% short interest the slightest bit of good news could cause a sharp quick rally.  We will keep you posted.