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Economy, Investing, Stocks  | October 26, 2021

Investors in construction and agricultural machinery heavyweight Deere & Company (NYSE:DE) have seen their shares gain 26.6% year-to-date and hit a multi-year high of $400.34 on May 10.

  • DE stock is up over 26% so far in 2021 and hit a multi-year high in May.
  • Deere is one of the most important names in the heavy machinery industry and well-known as the leading manufacturer of agricultural equipment worldwide.
  • Despite potential short-term volatility in the stock, buy-and-hold investors could regard any further short-term decline in DE shares as an opportune entry point.

Yet the stock closed on Friday, Oct. 22, at $340.71, losing about 15% lower than its mid-May level. The 52-week range for shares of Deere has been $221.73 - 400.34; the company’s market capitalization stands at $105.64 billion. The current price supports a dividend yield of 1.06%.

Headquartered in Moline, Illinois, Deere is one of the most important global manufacturers of heavy machinery. Readers are likely to be aware of at least some of the company's machines, which include bulldozers, commercial mowers, generators, tech-heavy tractors and utility vehicles.

The group issued Q3 metrics on Aug. 20. Revenue was $11,527 billion, up 29% year-over-year (YOY). Net income of $1.667 billion translated into earnings of $5.32 per share. A year ago, the comparable numbers had been $811 million, or $2.57 per share. All segments contributed to the robust results at Deere.

Management now expects full-year income of $5.7- $5.9 billion, up from the earlier projection of $5.3 - $5.7 billion.

On the results, CEO John C. May said:

“We also made strategic investments in the quarter aligned with our smart industrial strategy. They will further our efforts to help our customers achieve improved profitability, productivity, and sustainability through the effective use of technology.”

The company's products are part of daily farming operations domestically as well as internationally. Thus, DE stock has been benefitting from the growth of the agriculture industry. Meanwhile, management has been making acquisitions and investing heavily in technology.

For example, Wall Street is paying close attention to Deere’s autonomous tractors. They represent how disruptive automation technologies might make stocks like DE an important part of the fourth industrial revolution (4IR), which , according to is:

“A fusion of advances in artificial intelligence (AI), robotics, the Internet of Things (IoT), genetic engineering, quantum computing, and more.”

Prior to the release of Q3 results, shares of the agricultural bellwether were around $365. Since then, they have been volatile and come under pressure, especially since early September. Wall Street expects Deere to release Q4 metrics on Nov. 24.

What To Expect From Deere Stock

The shares have a 12-month price target of $400.32, implying an increase of about 17.5% from current levels. The 12-month price range currently stands between $265 and $480.

Trailing P/E, P/S and P/B ratios for DE stock stand at 19.74x, 2.49x and 6.72x, respectively. By comparison, these ratios for the capital goods group CNH Industrial (NYSE:CNHI) are 75.32x, 0.76x, and 3.98x.

On the other hand, they are 25.64x, 2.39x, and 6.53x for Caterpillar (NYSE:CAT), one of the leading equipment manufacturers worldwide. And finally for the agricultural machinery group Agco (NYSE:AGCO), these metrics stand at 13.63x, 0.94x and 3.14x.

Readers who watch technical charts might be interested to know that a number of DE's short- and intermediate-term oscillators are still flashing caution signals. However, the long-term uptrend remains intact.

As part of the short-term sentiment analysis, it would be important to look at the implied volatility levels for Deere stock options which typically shows traders the market's opinion of potential moves in a security. However, it does not forecast the direction of the move.

DE’s current implied volatility is 24.8, which is lower than the 20-day moving average of 26.0. In other words, implied volatility is trending lower, which might mean that options markets are not expecting big moves in the coming days. However, we might see increased choppiness around the earnings result of Nov. 24.

Our first expectation is for a potential pullback toward the $325 level, after which shares would likely trade sideways while it establishes a new base. In case of such a decline, long-term investors would then find better value.

3 Possible Trades On Deere Stock

1. Buy Shares At Current Levels

Investors who are not concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in Deere stock now.

On Oct. 22, DE stock closed at $340.71. Buy-and-hold investors should expect to keep this long position for several months while the stock makes an attempt toward $400, a level which matches analysts’ estimates as well as the recent multi-year high. Such an up move would mean a return of over 17% from the current level.

Readers who plan to invest soon but are concerned about large declines might also consider placing a stop-loss at about 3-5% below their entry point.

2. Buy An ETF With DE As A Main Holding

Many readers are familiar with the fact that we regularly cover exchange-traded funds (ETFs) that might be suitable for buy-and-hold investors. Thus, readers who do not want to commit capital to Deere stock but would still like to have substantial exposure to the shares could consider researching a fund that holds the company as a top holding.

Examples of such ETFs include:

  • iShares MSCI Global Agriculture Producers ETF (NYSE:VEGI): This fund is up 18.9% YTD, and DE stock’s weighting is 18.97%;
  • VanEck Natural Resources ETF (NYSE:HAP): The fund is up 25.0% YTD, and DE stock’s weighting is 7.34%;
  • VanEck Agribusiness ETF (NYSE:MOO): The fund is up 22.2% YTD, and DE stock’s weighting is 7.37%;
  • Clearbridge Focus Value ESG ETF (NYSE:CFCV): The fund is up 21.7% YTD, and DE stock’s weighting is 4.59%.

3. Diagonal Debit Spread On DE Stock

Our third trade is diagonal debit spread on Deere using LEAPS options, where both the profit potential and risk are limited. We have provided numerous examples (for example, here and here) of this type of options strategy that is also know as a "poor person's covered call" on a given stock.

A trader first buys a “longer-term” call with a lower strike price. At the same time, the trader sells a “shorter-term” call with a higher strike price, creating a long diagonal spread.

The call options for the underlying stock have different strikes and different expiration dates. The trader goes long one option and shorts the other to make a diagonal spread.

Most traders entering such a strategy would be mildly bullish on the underlying security. Instead of buying 100 shares of Deere, the trader would buy a deep-in-the-money LEAPS call option, where that LEAPS call acts as a “surrogate” for owning the stock.

For the first leg of this strategy, the trader might buy a deep in-the-money (ITM) LEAPS call, like the DE 19 January 2024, 250-strike call option. This option is currently offered at $112.05. It would cost the trader $11,205 to own this call option that expires in about two years and three months instead of $34,071 to buy the 100 shares outright.

The delta of this option is close to 80. Delta shows the amount an option’s price is expected to move based on a $1 change in the underlying security.

If DE stock goes up $1 to $341.71, the current option price of $112.05 would be expected to increase by approximately 80 cents, based on a delta of 80. However, the actual change might be slightly more or less depending on several other factors that are beyond the scope of this article.

For the second leg of this strategy, the trader sells a slightly out-of-the-money (OTM) short-term call, like the DE Dec. 17 350-strike call option. This option’s current premium is $10.45. The option seller would receive $1,045, excluding trading commissions.

There are two expiration dates in the strategy, making it quite difficult to give an exact formula for a break-even point in this trade. Different brokers might offer “profit-and-loss calculators” for such a trade setup.

The maximum potential is realized if the stock price is equal to the strike price of the short call on its expiration date. So the trader wants the DE stock price to remain as close to the strike price of the short option (i.e., $350 here) as possible at expiration (on Dec. 17, 2021), without going above it.

Here, the maximum return, in theory, would be about $1,656 at a price of $350 at expiry, excluding trading commissions and costs. (We arrived at this value using an options profit-and-loss calculator).

By not investing $34,071 initially in 100 shares of Deere, the trader’s potential return is leveraged.

Ideally, the trader hopes the short call will expire out-of-the money (worthless). Then, the trader can sell one call after the other, until the long LEAPS call expires in over two years.

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