Buy Low – Sell High. Time To Buy DOW And Olin Again (NYSE:DOW)

I have written extensively on both Dow (NYSE:DOW) and Olin (NYSE:OLN) in the past. For more background on DOW, please read (Buy DOW and TSE) my prior articles that dive directly into the investment case. For more background on OLN, I have numerous published articles on Seeking Alpha that explain the investment case in detail. (OLN is an Easy Double) and (OLN $100 PT). When DOW was approaching $70, I told investors that I was rotating out of DOW – not because I thought DOW was expensive, but that after seeing a pretty quick 40% upside (plus dividends), there were other cheaper names I found more compelling. Likewise, OLN ripped a quick 50% upside since their last quarter, and though I believe it ultimately will see much higher levels, the risk/reward favored again, rotating into other names that either had not moved yet or still have not had big upside moves. With the recent and rapid pullback on both DOW and OLN, I started buying back OLN in the $40s and will get more aggressive if it moves into the low $40s. And DOW back in the low $50s is a gift for those seeking a safe steady well-run company with a rock-solid dividend to weather what has been a challenging economic and market backdrop.

I am confident in asserting that the selloff in these names is due to some hedge funds being long as part of their bullish stance on crude oil. There have been very large positioning unwinds over the last few days on the back of crude, which had been strong despite all the economic uncertainty, finally selling off on recession fears. As I have explained in past comments and articles, DOW and OLN make more money when US natural gas is low vs crude oil and versus European natural gas. While oil has been down over the last few days, US natural gas is down a lot more, and European natural gas is up a lot because Putin cut European gas supply further. This means that the spread has actually IMPROVED for DOW and OLN as opposed to being worse which is what people automatically think when crude falls. When it comes to the market, my stock recommendations are pricing in a depression on a permanent basis, so I do not really care if the economy slows a little more (which is what I think) or if it is a little worse to technically qualify as a recession (two-quarters of sequential growth below zero).

I have been through a lot of cycles but I have never seen one in which people continue to liquidate at depression valuations. (All of my favorite stocks are at valuations significantly below the 2008 troughs which was a deep recession with true systemic risk to the banking system which could have caused a 1930-style depression.) This is happening even when we now have over two weeks of real-time data showing that the leading indicators of the economic cycle are turning POSITIVE! All of the negative data that are causing people to freak out is backward-looking. What leads the economic cycle is the monetary cycle and what drives that is inflation/deflation. We now have over two weeks of sharply falling inflation in every category from natural gas to gasoline to crude oil to wheat and grains while the continued easing of supply chain bottlenecks in Asia is bringing down transportation costs while increasing auto production which is putting DOWNWARD pressure on car prices.

The bond market is already starting to figure this out which is why yields have been falling. It is beyond irrational that people continue crushing equities, and cyclical/value equities in particular. The only time period that has some similarities is the trough in March of 2009 when the government backstopped the bond market with all the emergency measures. The day that happened I covered all my shorts, but it took the market a couple of days to figure it out. That was much more complex than what we have today. So the fact that 15 days have gone by and people continue liquidating is simply hard to fathom. Throughout history, people tend to freak out as it becomes more likely a recession is likely, but the reality is that by the time it is clear, it is likely the Fed starts to ease and stocks explode higher even though the backward-looking data is still weak for six months.

The bottom line is, DOW and OLN are now very compelling and make it to my TOP IDEAS LIST again. (Prati Top 6 Ideas). My top 6 picks remain TSE, LXS (Lanxess AG), CPRI, PVH, WRK, HEI (Heidelberg Cement) and now I add DOW and OLN to this list of very compelling companies with excellent free cash flow trading at rock-bottom valuations. HUN is starting to look very interesting again, and EVA looks like it might be an attractive value idea with the CEO and CFO buying a lot of stock yesterday.

TSE Has Likely Seen Its Lows And Is Poised To Move Much Higher

Lastly, I expect TSE to announce a styrenics sale any day. The CEO of Trinseo has transformed the company over the past few years, and it is now a specialty chemical player about to sell its last commoditized business, styrenics. This should be announced any day as management indicated on the last earnings call that this should be announced in calendar Q2. The CEO just reiterated this a couple of weeks ago. Thus, I expect TSE will announce this sale within the next month. I believe street expectations are very low. From analysts with whom I have spoken and in notes I have read from the sell-side, I believe consensus expectations for the styrenics sale is somewhere between $500mm at the low-end to $750mm at the high-end. I am expecting $1B +/- while the market cap is around $1.4B right now. So, it makes their business mix better, and more consistent, and they can buy back a lot of stock, increase dividends, etc.