Shares of Deere & Company (NYSE:DE) have rallied sharply after bottoming out at the $135 area.
DE stock added on another 5.75% on Friday following earnings that were somewhat disappointing but with guidance that was well received. The news over the weekend of lessened Chinese tariffs should also provide a boon to the agriculture sector, by far the largest buyer of Deere equipment. Look for Deere stock to be a solid performer over the coming weeks.
Earnings were a decided miss for Deere, coming in at $3.14 per share versus $3.33 consensus. Revenues also were a tad light at $9.7 billion compared to analyst estimates of $9.8 billion.
DE stock rallied, however, on the raised guidance. The company now expects full-year earnings of $3.1 billion compared to prior guidance of $2.85 billion. It also looks for sales to increase 30% overall on the back of higher pricing.
Factor in a comparatively cheap forward P/E ratio of under 17 for 2018-and even lower for 2019 and 2020- and DE stock looks attractive at current levels.
The news of lowered tariff tension out of China is a double positive for DE stock. Higher corn, bean and other agriculture prices will bolster customer demand while lower steel and aluminum prices will have direct-benefit costs. Definitely a win-win situation for Deere.
DE Stock broke out above major resistance at the $152 level, which now becomes major support. Shares are also poised to move through the widely followed 100-day moving average at $156.05.
This should also lend downside support as well. Even a break out move towards the old highs at the $175 area can’t be ruled out for DE stock considering the recent momentum. Time to be a buyer of any dip in DE stock.
Implied volatility (IV) is lower in DE stock per usual following earnings but is still at levels that make sense to be a seller of options. So to position to be bullish on Deere on weakness, a put credit spread is the favored trade. The trade also allows us to collect premium now to be a buyer later.
DE Stock Options
Buy DE June $145 puts and sell DE June $150 puts for a 70 cents net credit
Maximum gain on the trade is $70 per spread with a maximum risk of $430 per spread, Return on risk is 16.28%. The short $150 strike price is below the $152 support level and provides a 3.38% downside cushion to the $155.25 closing price of DE stock.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility.
