Good chemistry
06/08/18

What S&P sector has been battling Information Technology for dominance in recent weeks—and lately, winning?

Materials, that’s what. Metals and mining, construction materials—those sexy stocks people like to talk about at parties. And, oh yeah, chemicals, the group that has led the materials sector over the past week with a nearly 5% return.

Chemical companies have apparently been enjoying the past year or so. Sales were up last year (the American Chemistry Council forecasts a 3.7% increase for this year), and certain macro conditions have been favorable, especially the crude oil market: Because oil is a primary chemical input, costlier crude (recently pulling back but still relatively high) actually translates into higher-priced chemicals.1

And who’s the big dog on the chemical block? A familiar name—or actually, two names. DowDuPont (DWDP), the chemical colossus born of the merger of the already-huge Dow Chemical and DuPont, became tradable under its new ticker just last September. Before we get into some of the specifics of that deal, let’s look at the momentum up move the stock made to kick off June—rallying nearly 10% and decisively breaking out of a two-month consolidation in the process:

Dow DuPont (DWDP), 1/18/18 – 6/7/18. DowDuPont (DWDP) price chart. Strong start to June.

Source: OptionsHouse

One of the most interesting aspects of the DowDuPont story is that the mega-merger was actually pursued with the intent to split the combined company into three publicly traded (and specialized) units within 18-24 months after the merger was completed.2 (Right now, DowDuPont execs are saying the first of these offspring will get an IPO sometime in Q1 2019.3)

After the new ticker launched in September around $67, the stock took a somewhat jagged path to its late-January high around $77. It then sold off with the rest of the market in February, eventually bottoming in early April around $61 before the current upswing brought the stock back to $70:

Dow DuPont (DWDP), 9/1/17 – 6/7/18. DowDuPont (DWDP) daily price chart.

Source: OptionsHouse

The stock’s net performance over the past nine months may have disappointed some investors, given the deal created the largest chemical company in the world, and the bull market was still rolling during five of those months. But earlier this year some market observers argued the stock was significantly undervalued (when it was trading around $72) because the merge-and-then-split-three-ways scenario was making it difficult for some analysts and investors to get a handle on the value of the future spinoffs, and as a result, DWDP wasn’t getting credit for its better-than-expected cost-saving synergies.4

Is the current upswing and breakout a sign traders and investors have taken DowDuPont’s apparent progress to heart and are willing to bet on more upside? It’s impossible to know, but some bullish traders (who would likely expect shares to pull back a bit after their 10% run) may be looking for the stock to not dip back too far below the breakout level defined by the April and May highs—former resistance that is now support.

The stock could certainly test its late-May lows without quashing the possibility of a longer-term uptrend, but the return of buyers around this new support level may mean more upside is in store sooner rather than later.

 

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1 Chemical & Engineering News. Top 50 U.S. chemical producers of 2017. 5/7/18.

2  Barron’s. DowDuPont: Buy It Ahead of the Breakup. 10/21/17.

3 Bloomberg.com. DowDuPont's Flittering Says Target Is to Launch Dow Chemical IPO by 1Q of 2019. 5/4/18.

4 Seeking Alpha. DowDuPont Could Be Undervalued By Up To 40% Due To Spin-Off Confusion. 2/22/18.