We're starting a position in a recently added Bullpen stock for three main reasons

Published Mon, Aug 7 20231:47 PM EDT

We're initiating a new position in DuPont (DD), buying 375 shares at roughly $77.79 each. Following Monday's trade, Dupont will have a 1% weighting in Jim Cramer's Charitable Trust, the porfoltio we use for the Club. DuPont is getting called up from the Bullpen . When adding this specialty chemical maker to our watch list a couple of weeks ago , we talked about how the company has become an interesting industrial way to play the recovery in the semiconductor and electronics industries without paying a typically higher chip-stock multiple. When DuPont reported last, the quarter represented one more data point showing that a bottom in the semiconductor industry has formed and is about to start a new multiyear cycle of growth. The company's DuPont Electronics & Industrial (E & I) business makes differentiated materials and component solutions for high-performance computing, 5G, electronic vehicles, and consumer electronics like smartphones and PCs. Organic sales and EBITDA (earnings before interest, taxes, depreciation, and amortization) have been on a steady year-over-year decline since the fourth quarter of 2022 with volumes falling as customers de-stocked inventory in response to weaker consumer electronic demand and reduced semiconductor fabrication plant utilization rates. But DuPont said on its second-quarter earnings conference call that the bottom in its semi-business here, making for an attractive growth story in 2024. DuPont's bottom call jives with what we heard this earnings season across the semiconductor landscape. Signs from Club name Advanced Micro Devices ' (AMD) quarter suggests the PC market has bottomed. While Qualcomm's (QCOM) earnings suggest the smartphone market may need one more quarter of de-stocking, the trough is within reach. Also, the rise of chips used for artificial intelligence and other high-performance computing should drive the recovery in this business. One point to keep in mind is that DuPont tempered its semiconductor outlook for the second half of this year due to slower than expected recovery in China. Although the China market remains a question mark across a whole host of different industries, DuPont explained on the call it expects China will rebound at some point. Another important piece of the Dupont story is capital returns. The company has been sitting on excess cash ever since it sold its Mobility & Material (M & M) business to Celanese (CE) last year for $11 billion but terminated its $5.2 billion deal to buy Rogers Corporation (ROG) due to regulatory issues. With the extra cash on hand, DuPont repurchased $2.5 billion of debt and pledged the money that had been earmarked for Rogers to repurchase about $5 billion worth of stock. DuPont is nearing the end of its initial $3.25 billion accelerated share repurchase (ASR) program, which is expected to be completed within a month. Shortly after it's done, DuPont plans to announce a new $2 billion ASR. Accelerated share repurchase programs are a quick way for a company to retire stock to boost earnings-per-share, and they also can be a sign that management thinks the stock is undervalued — it's why they want to swoop in and aggressively buy back stock. Through its upcoming ASR, DuPont said that about 80% of the shares will be repurchased initially and then the other 20% will be bought over the next six months. There's also plenty of room for potential optionality in the future based on the strength of Dupont's balance sheet. Management is targeting a 2x leverage ratio and could be there by year-end. DD YTD mountain DuPont YTD performance We are initially starting our price target on DD at $85 per share, which was the target set forth by JPMorgan on July 19 when the firm added DuPont to its analyst focus list. (The stock closed Friday at around $77.) JPMorgan's valuation target was based on its sum-of-the-parts (SOTP) analysis — which is a way to value a company by applying an industry multiple to different business segments — discounted back slightly. Sometimes you have to take a SOTP analysis with a grain of salt because breakups are required for that value to be realized. But DuPont is a special situation. CEO Ed Breen is a legendary dealmaker who is always looking for ways to unlock value for shareholders. He did this by selling M & M at an attractive multiple, and we wouldn't put it past him to seek out more value-creating actions again if he felt the stock seriously disconnect from the company. (Jim Cramer's Charitable Trust is long DD. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Traders work on the floor of the New York Stock Exchange (NYSE) on August 02, 2023 in New York City.

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