Name That Trade – $DD: Activist Foxcatcher

by Dan October 1, 2015 3:45 pm • Commentary

For the first half of my career (as a trader at a hedge fund) I can tell you that my mornings prior to the market open were far less productive than I would have liked them to be. Fielding call after to call from research salesman, sales traders and traders at investment banks, all pitching their “pick to click” that day.  I learned a valuable skill then, which was filtering info.  In the second half of my career, I have less access to research and opinions from those selling them. In this period I also learned a valuable skill. Doing more with less.  These days I generally come up with my trading/investment ideas on my own, through reading a lot of financial news, watching the market daily and doing my own research.

Honestly, it’s rare when I get an idea from an investment blog, financial tv or an investment bank’s research report. As a participant on CNBC’s post market trading shows I hear a lot of opinions on a lot of stocks. Most I filter, but occasionally one piques my interest. I then do a little work on my own.

One such stock is Dupont (DD). For the better part of the last year activists launched a proxy fight in the stock. I basically filtered the story from my mind as the stock made new all time highs daily.  When the company won the fight and the stock started going down precipitously I started hearing a chorus of peeps defending the stock. Eventually most of them abandoned it.  I don’t hear much about DD on CNBC anymore. But with the stock down 31% on the year I find myself doing my own research.

To start, I like to get a sense for where the stock is and where it’s been.  An 8 year chart shows the stock’s healthy 400% rise from its 2009 lows to the early 2015 highs, nearly double that of the S&P 500 during the same period:

DD 8 yr chart from Bloomberg
DD 8 yr chart from Bloomberg

The late July break below the uptrend was an important occurrence, as the stock has been in a free-fall since.  At this point there appears to be little significant technical support for another 15 to 20% back towards $40.

It’s not just that investors agreed with management and didn’t give in to activists and split the company up. It’s also that the company is ground zero for the problems facing U.S. multinationals.  DD gets more than 60% of its sales from outside the U.S. It’s getting mauled by the strength of the dollar. And it sells chemicals to companies that are getting hard hit by weak emerging market demand. Analysts expect earnings and sales to decline 24% and 20% respectively this year, but miraculously(!) grow earnings 16% in 2016 on (only!) a 5% sales decline.  That’s a fairly messy situation to say the least.  I suspect we will see activist involvement soon enough, but the problems for DD at the moment don’t appear to be structural, they seem to be macro. The stock is on my watch list primarily because their fifth largest holder had a strong interest much higher. I suspect he likes it even more here.