Dow Chemicals has a new big investor: Dan Loeb's Third Point hedge fund. Should you be buying Dow Chemical shares with him?
Love is chemical and now Dan Loeb's hedge fund, Third Point, is in love with Dow Chemical.
Third Point has taken his largest position – a $1.3 billion stake in Dow Chemical, making him one of the company's top ten shareholders. Third Point manages a total of $14 billion.
In true Loeb fashion, he wants Dow Chemical to make some changes, namely splitting off its petrochemical business from the rest of the company. That's, of course reminiscent of last year when Loeb called on Sony to split off its entertainment side from electronics. Sony rejected that idea.
Judging by remarks made Tuesday by Dow Chemical CEO Andrew Liveris, the company's management may be open to suggestions but wants to have the ultimate say on what goes on. Speaking to CNBC from Davos, Switzerland, Liveris says:
"I have no problem with this notion of people coming into your stock and saying here's better ways to get things done. But what you have to do as management is to be thinking of those ways which I believe at Dow have been doing."
John Stephenson, portfolio manager at First Asset Investment Management, believes investors shouldn't jump into the stock with Loeb.
"This is not a cheap stock," says Stephenson. "It's trading at 16 times forward [earnings] and that's at a premium of a couple of turns to its peers. It's trading at eight times EBITDA (earnings before interest, taxes, depreciation, and amortization)."
Stephenson notes that various feedstocks are up dramatically, putting pressure on margins.
"They're getting squeezed," says Stephenson. "The whole premise going forward to add any value is they've got to harvest $4 billion worth of projects in the next year and a half or so. That's going to be a tough order and they have to do it at a premium to their current multiple. I think this is an expensive stock. It should be sold."
However, Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, disagrees with Stephenson on Dow Chemical.
"This is actually a compelling technical setup with an activist hedge fund kicker," says Ross. "That's what makes it a nice buy for me."
Ross calls the 1-year chart of Dow Chemical, up 50% since April 2013, a classic strong stock chart. On a long-term chart, Ross sees the stock as recently breaking out on the upside of a multi-year ascending triangle.
"In the process, we've taken out a ten-year downtrend that takes us all the way back to 2004," says Ross. "This is a stock that could have $20 of upside from current levels. I would be a buyer on that breakout."
To see more analysis of Dow Chemicals by Stephenson on the fundamentals and Ross on the technicals, watch the video above.
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- Basic Materials Industry
- Investment & Company Information
- Dow Chemicals
- Dan Loeb