Dean Foods Company (DF) is a restructured company, having split off its growth component (WWAV) earlier this year. They are attempting to de-leverage their extremely ugly balance sheet and position themselves as the “value play” in the milk/food producer space. So far, the efforts haven’t really paid any “dividends” for the firm, and an anticipated dividend for shareholders is also still missing. The bottom line is that DF has stripped itself down to a debt-heavy company, selling a commodity (milk) that can be extremely volatile, in a market that has seen soft-commodity prices dropping or just trending flat for some time.
We think DF is overvalued and investors are already starting to sell now that short-term speculation about a dividend has eased off. The move back up to the gap that opened last week should turn into a “dead cat bounce” sending the stock back to its intermediate lows prior to the spinoff at an adjusted price of $14 per share. We watched the Tyson Foods (TSN) report with a lot of interest. Although DF and TSN are obviously very different, they are quite correlated because of the underlying trend in soft-commodity prices. With both TSN and HRL fading at resistance levels, DF is likely to see investors selling at an accelerated rate.
Note — be VERY careful about your order for the DF puts. Because of the spinoff, there are some odd-lot contracts available. You may see double-strike prices that indicate one of the options is a mixed contract or odd-lot. We do not recommend those. They are illiquid and you need to understand all the assets behind them before making a purchase. They have a different price than we have listed below, so they should be easy to identify. However, if you have any doubts about buying the right contract, it would be worth it to call your broker and make sure you double check your order — especially if you are modifying our recommendation a little with a different strike or expiration date.
Recommendation: ‘Buy to open’ the DF January 18 Puts (DF140118P00018000).
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.