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.
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