Should You Be Greedy When Others Are Fearful?

Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dole (NYSE: DOLE) reported its third quarter earnings last week. The fresh and packaged foods manufacturer missed both earnings and revenue forecasts. The company reported a loss per share of -$0.06, which is a huge miss compared to the EPS of $0.14 that analysts were expecting. Revenues of $1.96 billion also fell short of expected $2.07 billion. Directly after the earnings announcement, the stock plummeted almost 8%. It would make sense if the price slump was solely a reaction to the earnings announcement, which it is not.

DOLE reached new highs two months ago when the company formally announced its restructuring plans to cut down its sky-high long term debt burden. Once final shareholders approval is received, Dole's packaged foods segment will be spun off and sold to Japan's Itochu Corporation. The proceeds of over $1.69 billion will be used to pay off creditors. (In case you missed out on it, click here). So, in mid September the stock hit its 52 week high of $15.19 (See below). However, by the end of the same month, its downfall had begun. Back then, I wasn't sure why because neither there was any substantial negative news in the market, nor could I get hold of the latest short interest (which gets reported with a delay of 15-20 days).

But it all makes sense now. As soon as the stock touched its peak, short sellers got active. Prior to this, short interest in the stock had relatively stayed stable, hovering around 11 million of the shares short against a total float of 52.64 million. By the end of September, short selling picked up pace and peaked to 15 million within a month.

As of now, Dole is the most shorted stock in the industry with 28.64% of its total float short and the interest has increased over 18% in the last half of October. Close competitor Chiquita Brands (NYSE: CQB) has the second highest short interest with only 9% of its shares short and has seen a decline in that interest lately and Fresh Del Monte (NYSE: FDP) has only a little over 2% of its float short. Other industry peers--Sysco (NYSE: SYY) and Core-Mark Holdings (NASDAQ: CORE) also have very small short interests compared to Dole.

  Short Interest % of Float Change within last 15 days
Dole
28.64% +18.48%
Chiquita Brands 8.99% -5.1%
Fresh Del Monte 2.37% +6.47%
Core-Mark Holdings 2.22% +3.98%
Sysco 5.45% +0.04%

Another subtle factor that I believe is responsible for the stock's poor performance is its latest insider activity. By the end of October or just 15 days before the third quarter earnings announcement, four of Dole's executives including CEO David De Lorenzo and CFO Joseph Tesoriero sold off a portion of their holdings when the stock was still above $12. Dole's Chairman David Murdock, who has been amassing the company stock over the past 4-5 months and holds over 60% of the company, also let go of more than 23 million shares in settlement of a forward contract, acquiring 2.2 million shares in exchange. Hence, a non-open market net sale of 21.2 million shares took place within this period.

Only two months ago, Dole had the lowest risk factor (beta) of 0.38 amongst industry peers, when Fresh Del Monte's risk was close to the market average at 0.98 and Chiquita's was almost double the market average at 1.81. Today, DOLE is a riskier investment to own with beta standing at 0.76, than FDP with a beta of 0.71. CQB has also relatively improved to 1.41.

Dole's average EPS for full year 2012 is forecasted to be around $0.94. A forward P/E of 11.63 gives the stock a fair price of 10.93. Analysts price the stock within the range of $14-$17. Prior to the announcement of divestiture of its packaged foods segment, I was bearish on the stock. The short term indicators I discussed above--short selling, insider selling and hike in its risk factor, all point to DOLE's over-valuation at the moment. However, in the long run, the divestiture is expected to improve its financials greatly, increase its focus on its core business of agriculture and fresh produce, pay down its debt and bring in half a billion dollars in cost savings. So, should you be greedy now when others are fearful? I say, hold!

 


PalwashaS has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Sysco . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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