DuPont (DD) blew out earnings and revenue estimates before the open on Tuesday, and the company raised its guidance for 2010. Yet the stock dropped 4% on Tuesday, a day when the broader market also cratered.
In doing so, the shares fell to the tandem support of their 10-day and 20-day moving averages. Note in the chart below how these trendlines have guided the stock higher for more than two months. In fact, the stock has gained more than 25% in that period, during which the stock never closed a day below both moving averages.
We think the sell-off after earnings was an overreaction. Sometimes the market blows off some steam after a stock runs up before earnings. We call that a “sell the news” scenario. And Tuesday’s big down day didn’t help matters.
But adding to our bullish case is the fact that just six of 15 covering analysts rate the stock a “buy,” leaving room for upgrades. Those may come along sooner than later should the stock continue its uptrend.
Speaking of an uptrend, it appears the 10-day and 20-day moving averages are doing their job, as the stock is up around 3% today. Perhaps yesterday’s solid earnings report from main competitor Dow Chemical (DOW) has the Street looking at DD in a more bullish light.
Whatever the reason, we believe DD’s rally has legs. Solid earnings, good support on the chart, and some lingering doubts among analysts are a bullish combination.
If you’re looking to leverage the move, consider a near-the-money DD call expiring in June or later this year to give the stock plenty of time to gain ground.
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