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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Dow Chemical

November 15th 2014 Dow Chemical
NYSE Symbol: DOW
Industry: Chemicals
Price as of 11/14: $51.37

For a fourth consecutive week, the major averages finished higher with limited selling pressure. The major averages feel like they want to go higher, but we are due for a down week. The oil sector remains one of the cheapest sectors long term. Last weeks featured stock, Halliburton rose 2% this week on news they are in merger talks with rival, Baker Hughes. This may put a floor under the oil related stocks in the short term. On Friday, the hedge fund and private equity community started to disclose their holdings in 13f filings. In years past a number of our big winners like US Airways (now American Airlines) and Gilead Science came from these filings. In my opinion it's always best to invest along with the smart money. A recent featured stock, Alibaba is a holding of many of the hedge fund community. This week we'll feature a stock that private equity manager, Dan Loeb owns and is actively looking to boost shareholder value. The stock of the week is Dow Chemical. The number 1 US chemical maker has been Dan Loeb's favorite stock for a while now, investing $1.5 billion in the stock to influence management and shareholders to consider spinning off slow growth businesses to focus on high margin faster growing segments. The CEO and management at Dow Chemical have other ideas (some similar) to improve shareholder value by selling off divisions to raise cash to fund a hike in the dividend and an increase to the share buyback plan. Whether Dan Loeb gets what he wants or management at Dow Chemical wins out, the real winners will be the the shareholders of Dow Chemical.

Last month, Dow Chemical easily beat earnings estimates by 5 cents or 73 cents a share for a record profit of $852 million. Revenues rose 5% year over year to $14.4 billion in the quarter on gains across performance materials, performance plastics and electronics, aided by increased pricing. Sales rose across all geographic regions in the quarter. Regarding the outlook for the company, management remains committed to achieving their financial targets and ongoing shareholder remuneration, and are taking targeted steps across various businesses to navigate through persistently slow and volatile global macroeconomic conditions. Looking ahead, management continues to leverage the power of Dow's global reach and industry-leading feedstock and operational flexibility to manage their portfolio in the midst of volatile energy markets. Their low-cost positions in key products such as ethylene and their deep integration with downstream, value-added products will continue driving profitable growth. In these conditions, having global scale and flexibility is the best hedge against volatile markets.

Looking at the valuation for Dow Chemical, the stock looks compelling. Currently the stock trades for 15 times next year's earnings, 13 times 2016 earnings, 1 times sales, and 2.6 times book value. But the big story for Dow Chemical remains the battle between management and activist fund manager, Dan Loeb. Management is looking to make a number of asset sales to return more money to shareholders. Dow plans to raise between $7 billion and $8.5 billion via asset sales by mid-2016 and is still on track to reap a previously announced $4.5 billion to $6 billion from asset sales by the end of 2015, which would include shedding some of its holdings in Kuwait. These moves have allowed Dow Chemical to hike their dividend by 13.5% boosting the yield to 3.3%. The company is also adding $5 billion to their share buyback or 14% of their market cap which is another good long term sign for shareholders. While Dan Loeb and management continue to fight, the real winners will be shareholders. Investors looks for a growth stock or an income stock would be wise to take a look at Dow Chemical.