Following up on my thoughts on Caterpillar (CAT), I think its worth noting the relative under-performance of its peer Deere (DE) which is up only 8% on the year, and down 7% from its June highs, vs CAT up 16.5% ytd and at a 3 month high.
72% of DE’s sales in 2015 came from the U.S and Canada, so far less exposure to dollar strength and emerging markets.
The technical set up over the last year is pretty interesting, with the stock bottoming in January, making a series of higher lows and and higher highs, with the growing potential for a gap fill back towards $90 in the event of a beat and raise when they report their fiscal Q3 results on August 19th:[caption id="attachment_64947" align="aligncenter" width="600"] DE 1yr chart from Bloomberg[/caption]
That said, the stock’s recent test of the uptrend, recent poor results and guidance that have caused two consecutive one day earnings declines of 5.5% on May 20th and 4.15% on Feb 19th, means bulls should only proceed with caution. Short dated options prices in DE are very near 2016 lows, making long premium directional strategies attractive:[caption id="attachment_64948" align="aligncenter" width="600"] DE 1yr chart of 30 day at the money implied volatility from Bloomberg[/caption]
Like CAT, sentiment in shares of DE remains very mixed with 9 Buy ratings, 8 Holds and 6 Sells with a 12 month price target of $79.16 by 19 analysts polled by Bloomberg, a few bucks below where the stock trades. Short interest sits at about 11% of the float.
So What’s the Trade?
Similar to CAT (and possible even more so) you want to define risk, especially with an earnings event coming up later on the day of August expiration. The August 82.5/87.5 call spread is 1.80 with the stock 82.25. That offers potential gains of up to 3.20 while risking just 2% in the underlying. With the stock already close to testing its 50 day moving average on this bounce, defining risk is the way to go to play for more upside. And With expiration and earnings the same day in August, long premium should stay bid as we get closer to that date
And I’ll offer the same disclaimer as I did in CAT earlier, Personally I am not chasing the SPX at all time highs for fear of missing out, but that doesn’t mean there aren’t opportunities. And a stock like DE could be at an interesting inflection point despite dollar headwinds.