I am going to keep this short and sweet. 3D stocks over the last two years was a clear example of an equity bubble that inflated, and then burst, having gained 800% from the start of 2012 to its all time highs in early 2014, only to see its shares decline nearly 80% since:
Earlier this week DDD management missed Q1 and pulled their forward guidance given what they call “Marketplace Uncertainties”. The stock is in a free-fall, despite 35% short interest and atrocious analyst sentiment with only 4 Buy ratings, 14 Holds and 7 Sells, with an avg 12 month price target of $25, a little more than 10% above current levels.
With a $2.5 billion market cap, trading at 3.25x expected 2015 sales, obviously that sales number is a moving target at this point, but I think it is important to note that a bit of the enthusiasm that manifested itself in the stock’s gains in 2012 to 2014 was well founded on what will be a massive secular shift towards 3D printing (heck my kids’ school has one that 3rd graders use) [editors note: an expensive school 🙂 – CC]
DDD options prices, while nearing 2015 lows are still very expensive, with 30 day at the money IV at 48% making long premium strategies challenged:[caption id="attachment_53462" align="aligncenter" width="600"] DDD 1yr chart of 30 day at the money IV from Bloomberg[/caption]
Earlier today a media report suggested that beleaguered internet services company YELP has hired a banker to find a buyer and the stock is up 25%. I can’t think of another sub-sector where a similar rumor could spark a massive rally than in 3D printing.
I want to make a near term contrarian defined risk bet. With the stock down here I am not buying as I am a firm believer that stock’s like this have the potential to massively overshoot on the downside just as they do and have on the upside in the past. I want to define my risk and get leverage to a massive unexpected view, recognizing that this could be a low probability event:
Trade: DDD ($21.96) Buy to Open Aug 21 Calls for 2.40
Break-Even on August Expiration:
Profits: above 23.40, up 6.3% from current levels
Losses: up to 2.40 if stock is between 21 and 23.40, max loss of 2.40 , or 11% of the underlying stock price.
Rationale: As I said above, throw out all bull market rules here, this thing is clearly in crash territory. But it wouldn’t take much for the sentiment to shift as it is downright horrible currently. Generally I don’t like to be this contrarian, but given the environment we are in, and the short interest in this stock, this kind of makes sense to me. On the first move back to the mid $20s I would consider selling some higher strike calls to create a call spread and reduce my premium at risk as it is not insubstantial. This is the sort of trade where I am clearly risking what I am willing to lose.