Why Family Dollar Soared Last Week and Delta Air Lines Plummeted

The gap between the S&P 500's (SNPINDEX: ^GSPC  ) best and worst performing stocks in any given week is typically large, and the past five days haven't been an exception, as Family Dollar Stores (NYSE: FDO  ) was up by 10% while Delta Air Lines (NYSE: DAL  ) was off by more than 7%.

Why Family Dollar Stores soared
In the case of Family Dollar, the market was responding to news that billionaire activist investor Carl Icahn has taken a 9% position in the discount retail chain.

As The Wall Street Journal wryly observed, "Carl Icahn has probably purchased only one thing at Family Dollar: its stock."

Perhaps more surprising than Icahn's interest in Family Dollar is that he's only one of many high-profile investors to recently stake claims in it. Together with hedge fund manager John Paulson and "takeover artist" Nelson Peltz, the three own almost a quarter of the company's outstanding shares.

FDO Chart

The rationale appears to be twofold. In the first case, it seems to reflect an unfortunate pessimism in the ongoing economic recovery -- and particularly among the patrons of deep-discount retailers.

In short, the slower the recovery, the better it is for companies like Family Dollar.

Additionally, as my colleague Dan Caplinger pointed out on Saturday, Icahn has his sights set on consolidation within the industry. "If successful," says Dan, "making Family Dollar a merger candidate could be the key to investors' long-term success."

Why Delta Air Lines plummeted
On the other end of the spectrum, Delta Air Lines was subject to a very different type of reaction in the market.

After more than doubling over the past year, shares in the transportation giant took a sharp downward turn on Wednesday after fears that an escalating conflict in Iraq could cause oil prices to increase.

DAL Chart

Suffice it to say, given that oil prices are one of the biggest expenses in the airline industry, the net result would be an almost certain decline in profitability for companies like Delta Air Lines, United Continental, and Southwest Airlines, among others.

Is this bound to happen? Not necessarily, as much of it depends on the positions of Delta's hedges. If it's positioned for a sharp increase in energy costs, it could even benefit relative to peers -- though, investors certainly shouldn't bet on this being the case.

Moreover, if the conflict in Iraq does weigh on oil prices, as I discussed yesterday, it's likely to be only temporary. The net result, as my colleague Adam Levine-Weinberg wrote last week, is that "the sudden weakness in airline stock prices could represent a good buying opportunity."

I, for one, would exercise more caution when considering whether to invest in this sector -- in fact, I wouldn't touch airline stocks with a 10-foot pole. But that being said, if a company like Delta Air Lines is on your watchlist, then this may be the opportunity you've been waiting for.

Will this stock be your next multibagger?
Give us five minutes and we'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with amazing potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303%! You don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2994846, ~/Articles/ArticleHandler.aspx, 8/31/2015 11:51:51 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

Today's Market

updated Moments ago Sponsored by:
DOW 16,540.85 -102.16 -0.61%
S&P 500 1,984.98 -3.89 -0.20%
NASD 4,801.76 -26.57 -0.55%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 11:41 AM
^GSPC $1985.30 Down -3.57 -0.18%
S&P 500 INDEX CAPS Rating: No stars
DAL $44.44 Up +0.50 +1.14%
Delta Air Lines, I… CAPS Rating: ***
FDO $0.00 Down +0.00 +0.00%
Family Dollar Stor… CAPS Rating: ***