Today's 3 Stock Picks: DOW, JNY, LINE

Shares of Dow Chemical (DOW) got scorched Monday as the fallout from a scuttled joint venture with Kuwait cast doubt on its planned acquisition of specialty chemical company Rohm & Haas (ROH).

The agreement, struck July 10, would have Dow, the Midland, Mich., chemical giant, acquire Philadelphia's Rohm & Haas for $15.3 billion or $78 a share.

But over the weekend political opposition led the government of Kuwait to cancel plans for a $17.4 billion joint venture with Dow. The end of the proposed Kuwait partnership deprives Dow of about $9 billion in cash it was counting on to help pay for the Rohm & Haas deal.

Dow issued a statement saying that it's in the process of evaluating its options pursuant to the joint venture formation agreement. Rohm & Haas said the end of Dow's Kuwait joint venture is not a closing condition for the proposed merger between the two chemical companies.

Oppenheimer & Co. analyst Edward Yang wrote Sunday that the Rohm & Haas deal isn't necessarily dead, but it will need some serious reworking. “We'd expect [Rohm & Haas] to be under severe pressure on Monday and possibly revisit its predeal price of $45, down 29%,” Yang wrote. “At this point, we would lean toward Dow renegotiating the [Rohm & Haas] price vs. walking away completely."

Yang added that Dow should recover more than $2 billion from the Kuwaitis, and although the Rohm & Haas cancellation fee is rather small at $750 million, Dow's Chief Executive Andrew Liveris has been "rather vehement" in his desire to consummate the Rohm & Haas deal.

Bottom Line: Hold
Betting on a merger is risky in the best of times, but selling now would be reacting to panic and a potential missed opportunity to own part of a stronger, more profitable Dow.

Shares in Jones Apparel (JNY) got shredded Monday as reports of a dismal holiday shopping season were compounded by the company's decision to cut its credit line nearly in half to reflect a downturn in its business.

Jones on Dec. 26 said it was slashing its revolving line of credit from $1.25 billion to $600 million, reflecting higher financing costs and the company's shift toward doing fewer acquisitions in a brutal retail environment.

The New York company runs retail outlets and also owns a number of well-known brands, including Jones New York, Nine West, Anne Klein, Gloria Vanderbilt, Easy Spirit and Evan Picone. As with many retailers, poor sales at Jones's own stores and at its department-store partners have battered the stock, knocking it down by about two-thirds in the past six months.

“The broader environment couldn't be worse,” says Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm in New York. “When you're in this kind of a situation, retail is going to get decimated, consumer discretionary is going to get decimated. There's a massive trade-down effect, the biggest I've seen in 40 years."

That trade-down effect is benefitting lower-priced retailers such as Wal-Mart (WMT), Dollar Tree (DLTR) and Family Dollar (FDO) at the expense of companies like Jones, Davidowitz says.

Although Jones's management has been wise in reducing its financing, it also signals that it views the current environment as grim, he added. “They're deleveraging like everybody else,” says Davidowitz. “What this shows is that Jones doesn't see themselves in this massive growth phase. Jones sees shrunken opportunities and they're trying to adapt.”

Bottom Line: Sell
This segment of retailing is going to get worse before it gets better, and there's no reason to hang onto shares of a company hocking goods that cash-strapped consumers can't or won't buy.

Shares of Linn Energy (LINE), a modest-sized oil and gas driller, got a boost from a recent report that the master-limited partnership will likely continue to return cash to investors despite plunging energy prices.

Linn saw its shares rise when an analyst wrote that the Houston company should continue distributing cash back to investors despite big drops in oil prices. A story in Saturday's issue of Barron's pointed out a number of reasons why the company's payouts remain secure. Linn trades as a master-limited partnership, a structure that offers investors the liquidity of a stock with the tax benefits of a limited partnership that returns much of its cash back to investors.

Citigroup analyst Richard Roy wrote recently that Linn's distribution level is "relatively secure" for at least the next two years or more, thanks largely to its aggressive hedging strategy.

“Linn Energy is attractive on many different valuation metrics, has the financial flexibility to weather the current financial crisis, is well insulated against volatile commodity prices, and has a relatively secure distribution,” Roy said in a Nov. 7 report.

Morningstar analyst Kish Patel wrote recently that Linn is slowing down its acquisitions in the face of more expensive financing, and is concentrating on production from assets it already owns rather than expanding and undermining its balance sheet.

“A greater internal focus has led to increasing organic production and a more manageable cost structure,” Patel said Nov. 13. “We think Linn's heading in the right direction and could benefit from a more selective approach to acquisitions in the future.”

Bottom Line: Buy
Linn's strategy makes sense, but it's probably worth waiting a until the headline-driven spike in its share price dies down before drilling in.