It’s no secret that 3D Systems (DDD) has a problem.
Valuations for 3D printing stocks ran amuck last year, as hype surrounding the technology reached a fever pitch. As a result, the entire sector has been punished this year, with DDD stock pounded more than 60% lower so far in 2014, and 3D Systems’ third-quarter earnings report (due next Monday) will do nothing to change that fact.
But there might be a silver lining for savvy options traders willing to take a risk.
3D Systems: Plenty of Pessimism
Let’s get this out there right now: 3D Systems will miss Wall Street’s third-quarter expectations. The company said as much on Oct. 22, lowering its earnings forecast to between 16 to 19 cents and its revenue expectations to between $164 million and $169 million. The consensus had been expecting earnings of 21 cents and revenue of $186 million.
The company’s excuse? Manufacturing and capacity restraints are keeping it from meeting demand and rolling out its latest products. In a press release that accompanied the earnings pre-release, CEO Avi Reichental said, “Strengthening sales of the company’s design, manufacturing and healthcare products and services were not enough to overcome the revenue shortfall from the continued manufacturing capacity constraints for its direct metals printers and delayed availability of its newest consumer products.”
What’s more, this will mark the fourth consecutive earnings miss for 3D Systems. According to Zacks data, the company has missed the consensus estimate in each of the past three quarterly reports.
Clearly, 3D Systems has some serious fundamental issues to work out, and many of DDD’s sentiment indicators agree.
For instance, 14 of the 23 analysts following the stock rate it a “hold” or worse, according to Thomson/First Call data. Furthermore, some 33.7 million shares of DDD stock are currently sold short, representing a whopping 32% of the stock’s total float, or shares available for public trading.
Even options traders are getting in on the act, as DDD stock’s November/December put/call open interest ratio arrives at a bearish reading of 0.96.
So where’s the potential trading opportunity amid all this negativity?
Click to Enlarge The opportunity lies to the upside. 3D Systems’ poor third-quarter report is already priced into the shares, and then some. The stock is trading at oversold levels, and nearly every investor on the Street is betting that additional declines are in store for DDD stock.
As such, the bar for “good news” has been set so low that any positive revelations on the production front, or 3D Systems’ ability to move new product, or sliver of positive fourth-quarter guidance will be seen as a win.
Now, if you are a buy-and-hold trader, you will want more than a sliver of positive data backing up your investment. But, if you are a short-term options trader, this type of news can provide an unexpectedly sharp, short-term boost for DDD stock — just the type of move you are looking for.
Options Trade on DDD Stock
With that in mind, those traders willing to take a risk on a potential contrarian play on DDD stock might want to consider a Dec $35/$38 bull call spread.
At last check, this spread was offered at $1.22, or $122 per pair of contracts. Breakeven lies at $36.22, while a maximum profit of $1.78, or $178 per pair of contracts, is possible if DDD stock closes at or above $38 when December options expire.
That said, given the stock’s poor technical performance, traders probably will want to use a limit order to close out their position before expiration if DDD stock hits a personally predetermined target or trades above $38 to lock in profits.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
