Name That Trade – $DDD With No Bounce

by Dan October 8, 2014 12:42 pm • Commentary

Earlier in the year, when high growth/ high valuation stocks in sectors like biotech, 3D printing, solar, social media and cloud storage/ internet security declined 20 to 50% from their highs in a matter of months, I was fairly certain some would never make new highs EVER again. I was wrong to think that some of the higher quality sectors like biotech and large cap social media would take years to make new highs (see CELG, GILD & FB), but there are many others that not only didn’t make new highs with the broad market but are now making new lows.

There is no doubt that 3D printing stocks were a mania for much of 2013, but a string of earnings disappointments, accompanied by decelerating sales growth and ludicrous valuations could be ignored no longer in 2014.

3D Systems (DDD) is making new 52 week lows today, and despite the stock’s 58% decline from the January highs it still trades at 53x 2014 expected earnings (this number could still go lower), and 6.4x expected sales.  With a $4.5 billion market cap, DDD could easily be an acquisition target for a large tech or industrial company, but at a time where tech companies are more likely to split up than bulk up, I suspect a takeout price would have to be somewhere near multiples that would make any such deal massively dilutive for the acquirer.

From a technical standpoint, the formation following the late 2013 move to the early March 2014 breakdown resembles a textbook head and shoulders top formation with the neckline at $60 (red):

DDD 2yr chart from Bloomberg
DDD 2yr chart from Bloomberg

Obviously, the break of $60 and then $50 (a level that the stock had consolidated around for long periods this year and last) yielded far lower prices, but was the Head and Shoulders formation identified above, just a formation inside a much larger similar formation (above in green)?

It is certainly hard to press a stock down almost 60% from the all time highs in less than a year, especially with short interest as high as it is in DDD (about 35%) and with the potential for M&A, so we won’t be doing that. I am highlighting DDD today because from a sentiment standpoint, it is important to identify the price action of former bull market darlings.  And very clearly, the price action in this stock, and for the most part in the entire space (except for Stratysys [SSYS]) is downright horrible.

In the chart above, I think it is important to note that the stock is very oversold, but nearing key technical support at $40 with no real support until the low $30s.  This would not be a high probability trade to play for a break of this level, and with implied volatility steadily rising into the company’s (yet to be confirmed) late October Q3 earnings, using options to express a directional view may only offer a slightly better risk reward than long or short stock.

For instance, with the stock around $41.80., the November 42 straddle (long the put and the call) is offered at about $6, implying that the stock would need to be above $48, or below $36 to break-even if you bought that, or about 15%.  Given the stock’s dramatic declines from the highs, the short interest and the fact it is approaching key support in front of a potentially volatile event, the implied move of about 15% between now and Nov expiration may actually look pretty fair.