DuPont (DD) is a solid global company, and in my opinion, it would be worthwhile for investors to take the time to diligently research DuPont to see if it is a good investment. However, at this time, I am of the opinion that the global economic temperature is not conductive to a long-term investment. Timing is the issue, as I believe the stock will see another downturn first. But for the opportunist, there is always the ability to find a way to make money!
On September 20th, Efsinvestment wrote an article titled DuPont May Have At Least 15% Upside. In the conclusion, the author writes:
"An uncertain industry climate, decreasing sales and less-than-anticipated revenue point to a disappointing future outlook. However, much of DuPont's loss in revenue can be attributed to the market conditions, as its competitors face similarly dwindling sales and revenues. Nevertheless, based on historical valuation metrics, the DuPont stock is undervalued, with at least 15% potential to reach its fair value. Even though the company has faced damaging lawsuits that negatively affect profits, DuPont remains a nifty investment."
I'm bearish on the stock presently for all the reasons the author stated in the summary of that article. I agree with the statement that the company has "…at least 15% potential to reach its fair value." Well, I am one of the ones that believe the other 85% working against it will win. There is no difference between DuPont and the average company for the quarter. It beat earnings estimates, but fell short in revenue just like the majority of the companies this quarter.
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Technically Speaking
The big picture is a possible ascending triangular breakout. Ascending triangle patterns are bullish and often form within uptrends in stocks as continuation patterns. The overhead resistance temporarily prevents the stock from advancing higher, while the rising trend line beneath the stock signals that buyers are still present. An upside penetration of the upper horizontal trend line is a technical buy signal for a stock breaking out from an ascending triangle pattern. It is a reliable chart pattern, but its performance would be considered mediocre. It looks like the stock has just broken out and if that is the case, we could see a 5 point move. The move looks to be supported by the RSI, which has remained in bullish territory; the MACD also looking quite bullish. Don't be surprised at a pullback before a move up, it is not uncommon for take a bounce off support in these types of climbs.
But if one looks at another chart with a longer history, there is a point in spring where the stock hit close to $53 a number of different times when it pulled back. The breakout will not have to challenge these multiple tops, and in this economic environment, I am not convinced it can break through resistance at this time. I would expect a pull back with the market. The only possible way I can see DuPont breaking through resistance is if QE3 kicks in positively for the markets and the bulls come out for a couple months, otherwise I do not see it happening.
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The Options Play
Presently trading at $51.80 I would expect a bounce off the resistance level of 53 because of economic conditions. Because of this, I am playing a bearish income play on the stock.
- Buy the January 2013 puts with a strike of '52.50' (priced at $2.79)
- Sell the January 2013 puts with a strike of '50.00' (priced at $1.68)
- Net Debit to Start: $1.11
- Maximum Profit: $1.39
- Maximum Risk: net debit
- Maximum Length of Play: 4 months
Reasoning behind the Trade
- Decreasing sales and shrinking revenue is never bullish
- Macro economic environment is not favorable to short term growth
- Resistance level is too strong in these market conditions
- There is no visible catalyst to vault this company forward presently
