David Tepper made waves last year when he said he was bullish on the stock market regardless of the economy: If the economy improved, stocks would go up. If the economy weakened, Bernanke would pump up the market.
And that trade has been killer.
His latest big move may have the same reasoning. Shares of Dean Foods, the milk company, surged on Friday on news that the hedge fund manager had taken a 7.35% passive stake on the company.
He hasn’t given his reasoning for the trade, but before we speculate, take a look at what share of the company have done. It’s been ugly.
What’s gone wrong for the company? Basically it can be summarized in one chart, the price of a retail gallon of milk minus raw milk costs. Margins have been crushed thanks to high commodity costs, and the inability to pass them along to retail customers.
So what’s Tepper’s thinking here?
It might be something like this: If the economy starts to strengthen, then end demand and pricing power will finally begin to catch up to raw material costs.
If the economy weakens, then raw material commodity costs will drop, margins will widen again, and Dean Foods will benefit from the inherent defensiveness of the product (milk).
Only in the status quo scenario (increasing commodity costs, no end improvement) does the investment not work, though even still he’s getting the stock at historically cheap levels.
Sounds like his kind of bet.
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