Activist investor Carl Icahn last Friday was at it again when he disclosed a 9.4% stake in discount store chain Family Dollar (FDO). As one would expect, the transaction made plenty of noise (including guesses about the possible outcome), and FDO stock rallied strongly in what was a technically significant move.
Active investors and traders may find this an opportune moment to play Family Dollar from the long side.
Typical to his investment style, Carl Icahn finds FDO stock to be undervalued, and he said he might look to get seats on the company’s board. Rumors then made the rounds that Icahn might push for a merger between Family Dollar and Dollar General (DG), which also resulted in a big rally in DG shares, pushing them to an all-time high before settling the day off the highs. Various analysts also said this potential merger would make sense, which only added fuel to the fire.
Looking at Icahn’s latest move objectively…
With a near 10% ownership of the floating shares, Carl Icahn is putting his money where his mouth is, which in theory should support the stock price. Historically speaking, a supportive activist shareholder has been good for a company’s stock price, though this can vary from situation to situation. Icahn typically expects his stake to appreciate in value, either through some special dividends or through a rise in the stock.
In my findings, these activist investor situations are particularly interesting when the news flow synchronizes with the charts (i.e., both the technical picture and the news is positively skewed for the stock price).
FDO Stock Charts
Looking at the multiyear chart of FDO stock, note that the slide from the September 2013 highs ended in mid-May as the stock touched its multiyear uptrend line. The stock has resistance near the $74-$75 area, which is marked by the double top from June 2012 and September 2013 (blue boxes), but that’s another 8%-9% higher from Monday’s close.
Closer up on the daily chart, note the technical significance of Monday’s 13%-plus rally in FDO stock. Although the stock had already moved nicely higher off its May lows during the prior two weeks, Monday’s move ripped the stock right above the 100- and 200-day simple moving averages (blue and red lines respectively), as well as the diagonal resistance line dating back to last September.
This breakaway gap doesn’t have to continue in the upward direction right away, but the momentum, the technical bullishness and the news flow here could all conspire to drive FDO stock toward the low to mid-$70s in the coming weeks or months.
Considering the uncertainty around Carl Icahn’s specific plans for Family Dollar, however, this is not a situation on which you should make a huge bet.
Still, active traders can buy the stock on a break above Monday’s intraday highs near $70.30, or wait for FDO stock to consolidate, which it should do without violating/breaking below the 200-day moving average (red line).
Learn more in my video below.
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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.