Dean Foods Stock Finds New Lows After Downgrade

J.P. Morgan Securities cut DF to "underweight" from "neutral"

Managing Editor
Aug 17, 2018 at 10:15 AM
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Dean Foods Co (NYSE:DF) stock is down 9.8% to trade at $7.87 this morning, and earlier touched a new seven-year low of $7.69, after J.P. Morgan Securities downgraded the food & beverage name to "underweight" from "neutral," while slashing its price target to $6 from $9. The analyst in coverage cited a possible third-quarter earnings miss, and the higher cost of raw milk, for the downgrade and new target, which stands in uncharted territory for DF stock.

Today's drop makes Dean Foods the third-worst stock on the New York Stock Exchange (NYSE) this morning. From a longer-term perspective, the shares have now shed 33% in 2018, after being turned away at the $11 level in early July, and gapping lower earlier this month following a subpar earnings report and lowered full-year forecast.

In terms of options data, buyers have been targeting calls, albeit amid light absolute volume. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows 1,102 DF calls bought to open in the past 10 days, compared to just 255 puts. However, given that short interest increased in the most recent reporting period to its highest point in over a year, it's possible some of this call buying -- particularly at out-of-the-money strikes -- could have been shorts seeking an options hedge ahead of earnings. 

Whatever the motive, near-term volatility expectations being priced into Dean Foods options are near extreme lows following the company's earnings report last week. This is based on the stock's Schaeffer's Volatility Index (SVI) of 32% -- just 8 percentage points from a 12-month low. 
 

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