MorningWord 6/9/14: $FDO – Exchanging Dollars

by Dan June 9, 2014 9:30 am • Commentary

After the market close Friday on Twitter, activist hedge fund investor Carl Icahn disclosed a 9.4% stake in retailer Family Dollar (FDO) :

Icahn’s filing offered no clues to his intention to extract shareholder value, but the company has been rumored to be a takeover candidate for larger competitor Dollar General for some time.  Rumors are just that, rumors, and holders of FDO in 2014 seem to discount the potential for an acquisition at a premium, selling the shares to new 52 week lows on May 21st.  But the stock subsequently bounced off of the lows, rallying almost 9% in the 11 trading days preceding Icahn’s late Friday announcement:

FDO ytd chart from Bloomberg
FDO ytd chart from Bloomberg

The year to date chart above shows the stock’s recent break above the Feb/Mar breakdown level.  The stock is up almost 13% in the pre-market, merely on the acknowledgement of Icahn’s stake, placing it right about at the 2014 highs, which could serve as some technical resistance in and around $68.  While Icahn certainly has had a fantastic track record, this is not a situation that makes a ton of sense to chase, as the activist has proven to be patient nominating directors and pushing for change.

EBAY is probably the best example where if you chased on day following the Jan 22, 2014 announcement of his involvement you might have had gains temporarily in the internet laggard, but the stock has since given back its “Icahn Bump” and is now flirting with 52 week lows:

EBAY 1yr chart from Bloomberg
EBAY 1yr chart from Bloomberg

With the pre-market gains, FDO is now up about 20% from the 52 week lows. If the gains hold Icahn has already extracted a bit of value in the company but now it makes sense to wait and hear what his plan is.

Prior to the announcement on Friday, options on the stock traded 2.5x average daily volume, most being calls and most having coming from a bullish roll where a trader sold to close 4,000 June 60 calls at 1.00 and bought to open 5,000 of the July 25th expiration 61 calls for 2.05.  While this appears suspicious, the trader/investor was merely rolling out an EXISTING bullish bet, and if anyone had the news ahead of time (Mikelson’s caddy?) that Icahn was going to disclose his stake on the close they WOULD NOT buy 5,000 call options in a weekly expiration a month out as this would clearly raise eyebrows in the financial press and certainly amongst regulators.

So while we would love to call attention to a sketchy well timed trade, it was more likely the product of dumb luck from an existing investor looking to lever up a beleaguered holding in a long rumored take-over candidate.