Shares of The Dow Chemical Company (NYSE:DOW) rose 5% in premarket trading after activist investor Dan Loeb reported a $1.3 billion stake in the company. His Third Point fund is also calling for a strategic review. After the disclosure, shares of the company climbed nearly 7% in premarket trading and increased another 5% in early trading.

See the full Q4 letter to shareholders here.

Dan Loeb Third Point

Third Point sees underperformance at Dow

According to Third Point’s quarterly investor letter dated today, the firm’s biggest investment right now is The Dow Chemical Company (NYSE:DOW). The firm states that the company’s shares “have woefully underperformed” over the last 10 years after generating a 46% return including dividends, compared to the Dow Chemicals Index’s 199% return and the S&P 500’s 101% return. Third Point also notes that almost 15 years ago, investors could have purchased shares of Dow Chemicals at about the same price they trade at now.

In addition to the weak yields, Dan Loeb’s fund also said the company has a “poor operational track record across multiple business segments, a history of under-delivering relative to management’s guidance and expectations, and the ill-timed acquisition of Rohm & Haas. The firm also said the weak performance from Dow Chemicals is “even more surprising” because the shale gas industry in North America has provided a big tailwind for Dow’s petrochemical business, which is its biggest business exposure.

Dan Loeb pushes for petrochemicals spin-off

Because of the underperformance at The Dow Chemical Company (NYSE:DOW) as a whole and the strength of the company’s petrochemical business, Loeb believes that the company should conduct a strategic review. Specifically, his firm suggests that they assess whether the petrochemical business should be separated from the rest of Dow, whether the petrochemical operational strategy maximizes profits and whether the businesses “align with Dow’s goal of transforming into a ‘specialty’ chemicals company.” The activist firm suggests that separating the petrochemical businesses through a spinoff could “drive greater stakeholder value.”

By separating Dow’s petrochemical business, Dan Loeb thinks the company would be more quickly able to transition into a true specialty chemicals company. In addition, he thinks that on its own, the petrochemicals company could “realign its strategy away from largely focusing on downstream migration / integration and towards overall profit maximization.”

And by optimizing the petrochemicals business, plus the “significant step-up in earnings” noted from management’s organic growth initiatives, Third Point sees future EBITDA “well in excess of $9 billion on a stand-alone basis.”