The market has been seemingly uprooted and bulldozed in 2016, but farm equipment giant Deere & Company (DE) has been quietly planting the seeds for a technical breakout.
For bullish investors and with a possible earnings catalyst on the horizon, a vertical spread in DE is looking like the right equipment for the occasion.
Let me explain.
Last quarter, farm equipment giant Deere delighted investors, who overlooked a sales miss and decline in favor of a 34 cent profit beat on earnings of $1.08 per share which resulted in shares of DE finishing higher by 5% at $80.
What Deere can deliver this quarter is still unknown. Unsurprisingly though, given the weak market environment, analysts are forecasting slightly gloomier times for DE.
The Street is currently expecting Deere to produce profits of 70 cents with a range from 51 cents to 86 cents. The estimate, if accurate, would represent a decline of 38% from the year ago period’s earnings of $1.12.
At the same time, analysts see hurtful currency translation for Deere impacting already weak equipment sales, with revenues estimated to drop 22.3% from last year to a figure of $4.96 billion.
It’s not all bad news for John Deere though, and maybe for DE shareholders as well.
As InvestorPlace’s Aaron Levitt wrote in early December that during this tough operating environment, DE has been hard at work controlling costs and being smart innovators by making today’s tractors “basically brains with a plow.”
Having said that and given forecasts have been known to be wrong (see above if necessary), as well as an overall neutral-to-bearish analyst community ripe for being more supportive of DE and a price chart that’s hinting at sunnier days for shareholders, we’re bullish on DE.
DE Stock Daily Chart
The daily chart shows a name that’s never really recovered from the late August flash crash. The good news is, shares of Deere have established a much more constructive-looking base than most stocks getting raked over the proverbial coals at this moment.
An examination of DE shows a descending triangle, or perhaps complex double-bottom pattern, has developed since August. The formation(s) in DE are determined to be bullish at this juncture, as it has been built around the 50% – 62% Fibonacci levels from the 2011 cycle low to 2015 high.
Technically, there is still a bit of lateral resistance from lows set in 2013 and 2014, as labeled on the DE price chart. But with a break of the triangle’s down-sloping trendline this past week and multiple tests of lateral resistance already in place, we’re optimistic the path of least resistance is up in DE.
And next week’s earnings event in DE stock could be just the catalyst to send shares higher.
DE Stock Long Bull Call Strategy
For bullish traders looking to initiate a position in DE stock in front of the report, the March $77.50 / $80 bull call spread for up to $1.25 is attractive.
The slightly out-of-the-money vertical requires less than 5% of upside in Deere stock in order to capture the full profit potential of $1.25 and return of 100%. To break even, DE stock only needs to gain 3% at expiration in March.
Given that this DE vertical also affords the trader limited risk through earnings, maintains sufficient time on the calendar for potential bullish follow-through and reduces unwanted volatility and time decay risks — being a bull nibbling on Deere is a tastier proposition.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
