Entering text into the input field will update the search result below

Update On 3D Systems Position

May 20, 2013 1:31 PM ETDDD
Jay Unni profile picture
Jay Unni's Blog
662 Followers
Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

I had written an article arguing we were now in an acceleration of the boom phase of 3D Systems (DDD), and I am beginning to doubt my own investment thesis. I had been expecting analyst upgrades, based on the 250 basis point increase in the gross margins that 3D systems was generating. These have manifest, at both Canaccord and Janney Capital.

However, 3D Systems was recently downgraded by William Blair's analyst Brian Drabb. Mr. Drabb had appeared very anxious about organic growth on the previous conference call, and it seems the CEO's answers were unable to satisfy his concerns. This event is important because it indicates a possible shift in perception.

One analyst downgrading is not indicative of a whole market shift, but it does show a weakness in the bull thesis. What I am questioning now is whether we are really in a twilight phase - where both investors and analysts don't truly believe in the underlying thesis anymore, but they continue to play the game. If this is true, we could be in for a catastrophic downward acceleration soon.

An addition weakness in the thesis comes in the form of a technical sign of a reversal. There was a doji on May 14, a downward hammer on May 15, and a down-day to confirm the hammer signal on May 16. This is a pretty strong reversal sign.

The stock is still quite popular with retail investors, who don't seem to be doubting the thesis. But a second downgrade could mark the beginning of a sudden catastrophic downward acceleration (Stages 7 and 8 of the reflexive cycle, as outlined in my article), which increases the risk/reward ratio enough to make my position dangerous.

I hate to change my position so soon after arguing for a continuation of the boom phase, but if my investment thesis has been weakened, I have no business staying long the stock. Thus I have closed my position.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in DDD over the next 72 hours.

Additional disclosure: I have recently closed a long position in DDD.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You