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Watch Out! Gurus Have a New Favorite for the Short Term

March 12, 2014 | About:

At the beginning of March, after analyzing the settlement data published by Nasdaq, Forbes published an article by Dividend Channel that announced that DuPont (DD) had taken over Verizon (VZ) as the second most shorted stock in the market. The conclusion has been reached after a comparative between the “days to cover” metric because it considers both the total shares short and the average daily volume of shares typically traded, the paper said.

DuPont’s stock substituted Verizon after a deterioration of the metric for the first and an important recovery by the second. According to the same source, this could mean short-sellers are using the stock to hedge a long bet elsewhere, or could also mean that short-sellers believe the price of the stock will decline.

What Does the Company Say?

Management can be proud about the company’s recognition by Forbes as one of the world’s “Most Admired Companies,” and the 2014 Sustainable Bio Award for Bio-Based Product Innovation of the Year. However, the market is more than perception; is about concrete results and rewards, especially for shareholders.

To improve overall performance DuPont has presented a new strategy for its seeds segment. The new plan aims at improving production while exploiting the expected higher demand for food. In short, management wishes to absorb new market synergies through a differentiated marketplace position with whole-farm decision services. In this context, the introduction of Encirca services is not trivial, and an impact of more than $500 million annually for Pioneer is expected.

DuPont has also announced the opening of a new office in Myanmar. This is the 8th ASEAN country and the 19th Asia territory where DuPont has a presence, meaning that geographical expansion is not declining and continues to be a pillar for the business model. Besides all the benefits the new office may derive from one of the fastest growing economies, political instability has not ended and threatens to interrupt operations at a moment’s notice.

A new strategy has also been announced for the agriculture and nutrition health segments. “We are focused on increasing our return on research and development through innovation; expanding our global reach; and strong execution in our Agriculture and Nutrition & Health segments,” said Executive Vice President James C. Borel. The downside related to such approach is higher uncertainty over current investments.

What Analysts See

Currently trading at 21.7 times its trailing earnings, the stock carries a 45% premium to the industry average. Moreover, the largest gurus holding a position, James Barrow (Trades, Portfolio) and Jean-Marie Eveillard (Trades, Portfolio), present no changes since June 2013 and operating margins declined since 2010. Also, revenues, net income, and debt have shown no progress during the last 3 years. And operating margins have deteriorated through the same period.

The seed genetics and crop protection segments are responsible for most of Dow’s growth lately. And the Latin American region continues to offer opportunities for growth through solid order book and healthy supply of seeds and crop protection products. The North American region is another region that offers strong prospects due to strong planting activity.

The performance chemicals segment is the most troubled. Profitability has been negatively hit by a lower demand of titanium dioxide related to challenging economic conditions in Europe. DuPont, in turn, has decided to divest the segment. However, the decision will not be followed through until next year.

What to Do

DuPont is a remarkable company that has been around for some time now, characterized by the introduction of many market-changing products. Nonetheless, the company is going through a restructuring that includes cost-cutting policies and capacity adjustments. And the recent drop in stock price is another evidence of the effects associated with the stock turning into a short-term investment favorite.

Disclosure: Vanina Egea holds no position in any of the mentioned stocks.

About the author:

Vanina Egea
A fundamental analyst at Lone Tree Analytics

Visit Vanina Egea's Website


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