DuPont (DD) is a global chemical and technology conglomerate that manufactures materials used in automotive manufacturing, construction, pharmaceuticals, agriculture, and electronics. It peaked for about six weeks at 53 until the economy pulled it down along with everyone else. This recent pullback has made the stock an inviting entry point. DuPont has an acquisition strategy that looks really good. Here we look at two recent examples and advise on a short term income trade while watching the stock through the third quarter of the year for an advisable long term entry point.
Minority Stake in start up Nonocomp
DuPont invested in a minority position in Nonocomb which uses lightweight and incredibly strong carbon nanotubes to build components for U.S. military and aerospace programs. Sales aren't exploding yet at this small company but it expects to exceed $20 million next year. This was a great move by DuPont for both companies. The Department of Defense designated Nanocomp materials as "critical to national defense." It makes four different products: (yarn, wire, tape, and sheet products) using carbon nanotubes. Spinning them into everything from body armor to wiring for airplanes, the material can absorb radar signals and is an incredible conductor of electricity. DuPont's size, experience, and expertise will help the company expand into larger markets including non-military industrial markets. It is a good move for both companies.
Agricultural Potential with the Pannar Deal
DuPont's seed subsidiary, Pioneer Hi-Bred, is buying the company, Pannar Seed Ltd. This will be a great long term investment for the company in this region. In this region (South Africa) there happens to be three main players in the seed business: Pioneer and Pannar, along with St. Louis-based Monsanto Co. (MON), and all are about equal in market share. Pioneer now has a clear advantage over Monsanto in the region with this acquisition. This whole region offers amazing revenue potential. South Africa happens to be the first country on the African continent to adopt genetically modified seeds. Moving in that direction for corn are Kenya and Ghana. The purchase of Pannar opens up these markets since it already has business in both countries. But the whole sub-Sahara region is open considering they lag behind U.S production due to older technology. African farmers typically yield about 1.5 metric tons per hectare, Jacobi said, versus 10 metric tons in the U.S.
DuPont is trading at $49.07 at the time of this article. On the last two low points of the daily chart, we can see a positive divergence in the RSI. This could mean a weakening in the downward trend. If so, this last push up could be the beginning of a much greater push. DuPont is a good candidate for a long term play, but with the economy struggling as it is, we would watch the stock through the next quarter to see where it is going. In the mean time, since we are bullish on the stock, we are looking at a bullish income play through the fall.
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The Options Play
- Buy October 2012 call with a strike of '50.00' (priced at $2.67)
- Sell October 2012 call with a strike of '52.50' (priced at $1.48)
- Net Debit to Start: $1.19
- Maximum Profit: $1.31
- Maximum Risk: Net Debit
- Maximum Length of Play: 5 months
Reasoning behind the Play
- Dupont has fallen but looks to be rebounding.
- RSI shows a positive divergence in the lows and this could signal weakness on bearish influence.
- Recent purchases open up new revenue streams investors like to see.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
