Don’t Throw That Out! – I’ll Eat It! (DAR)

Ever noticed that the worst excesses of governments and corporations are given innocuous sounding names and descriptors to take the edge off the brutal truths that underlie them?

It’s euphemism run wild these days to describe everything from firings (‘downsizing’) to dying (‘negative patient outcome’) to raw sewage (‘biosolids’) to designated homeless camps (‘compassion zones’), to kidnapping foreign nationals and bringing them to Guantanamo (‘extraordinary rendition’) to taxing people to death (performing ‘budget reinforcement’ operations).

Sick, the way language is employed at times.

But we never imagined a day when companies themselves would be named according to best euphemistic practice.

Well, allow us to introduce you to Irving, Texas’ Darling Ingredients (NYSE:DAR).

Sweet, Innocent and Pure

And what do you suppose this 140 year old company does?

Make jams, maybe?

Package up lovely spices?

Produce baking and sweetening agents for the gourmet crowd?

No, no, friend…

According to its own literature – DAR “collects and transforms various animal by-product streams into useable and specialty ingredients,” and “recovers and converts used cooking oil and animal fats, and residual bakery products [via its restaurant ‘grease trap collection and disposal services’] into valuable feed and fuel ingredients.”

In other words, you and your pets are eating it.

Thank you, darling…

Now to business.

These biodiesel pushers have nary a fundamental leg to stand on.

To wit –

• P/E is 42.68,
• Price to Book is 4.25,
• Dividend Yield is ZILCH,
• Most recent Quarter over Quarter earnings shrunk by 81.50%, even though
• The company bested analyst earnings expectations by a few cents on March 2^nd.

That revision-aided ‘earnings beat’, by the way, provided an opportunity for insiders to sell a fortune in stock.

Over the last six months, $37 million in shares were offloaded by the C-suite, of which just shy of $30 million was dumped in just the last two weeks!

Yes.

When you’re processing 10 percent of the world’s ‘inedible meat byproducts’ and making ‘phosphate-based fertilizer’ from pig manure…

You know the difference between what’s valuable and what’s cr*p!

Now look at the chart –

Technicals present a troubling picture –

1. RSI overbought in early January (circled, in red) led to
2. Negative divergence from both RSI and MACD indicators, a signal that buying momentum is drying (in green).
3. Indeed, volume figures show a burst of activity at the beginning of the month (in black), when insiders entered the market to sell into ‘strength’ after the earnings release.
4. That action brought price to the upper edge of a long term trend channel (in blue), after which volume dried up and price began to fall.
5. With MACD now rolling over, we expect price to move to the lower edge of the trend channel at 65.  There, an unorthodox ‘gelatin, re-rendered fat and synthesized protein’ battle will likely ensue.

Not your typical food fight.

Now consider the weekly –

1. Please be aware that all three RSI indications – daily, weekly (in green, above) and monthly – sent overbought signals in January 2021 (monthly not shown).  Next to a voice calling from Heaven, this is about as close as you get to ringing a bell.
2. MACD is now trending at levels never before seen in the company’s history, and
3. Get this – 25 years of data show a range of price activity between $1 and $25.  Then, after arguably the greatest economic rupture in history, DAR stock quadrupled in price.

And we’re not buying it.

Without mincing words, we feel it’s time to bring the hammer down on this waste case.

Recipe’s as follows –

A Jew and His Gold recommend you buy the DAR July 16^th 80 PUT for $11.20 and sell the DAR July 16^th 85 CALL for $4.30.  Total debit on the trade is $6.90.  Set a STOP buy on the stock at 85.

Rationale: with downside expected in the very near term, we’re structuring this synthetic short with staggered strikes to offer us a little more play room on the upside.  It means we have to wait a little longer to profit from any decline, but that’s not tragic.

Breakeven arrives at $73.10 – 3.4% below the current price of $75.75.

Maximum gain is unlimited.

Maximum loss will be $6.90, though it’s very unlikely we’ll realize that.

Should the stock shoot north (through our 85 STOP), we’ll consider selling the long 80 PUT and likely see a healthy return from it – depending, of course, on how close we are to expiry.

Other possibilities:

Had we sold the 80 CALL (instead of the 85), we would have begun profiting from a higher breakeven ($74.90 instead of $73.10).  And you should feel free to set the trade that way, if you please – it will cost you less to put on, certainly – but you may also end up playing with setting and resetting STOPs at the 80 level if price gets whipsawed.

We’re bumping it up, paying a little more for the trade and monitoring it all the same – just to avoid the to-ing and fro-ing theatrics of that 80 area, where there’s significant overhead resistance (and where round numbers often produce sticky trading).

Many happy returns,

Matt McAbby

Follow @HughLOHaynew