Yesterday analysts at Bank of America Merrill Lynch downgraded the shares of global agricultural equipment giant Deere (NYSE:DE) on concerns that the market wasn’t looking at DE stock correctly.

Namely, the analysts pointed out that Caterpillar (NYSE:CAT) has been the poster child for the U.S.-China trade war, and that CAT stock has consequently been hit. But Deere has been viewed as less vulnerable to the conflict, and DE stock has consequently weathered the trade war much better. But the analysts argued that this discrepancy makes no sense, and that DE is just as vulnerable as Caterpillar to the U.S.-China trade war.

This note resonated with me for two reasons. First of all, DE stock has performed much better than CAT stock, yet both have broad exposure to the trade war. Secondly, and more importantly, the valuation discrepancy between DE stock and CAT stock is nearing levels that have boded badly for DE stock in the past.

As a result, I think the Bank of America analysts are right. Deere is a great company. But DE stock is out over its skis. The technicals, valuation, and sentiment of DE stock are hitting ceilings.

Overall, DE stock is maxing out. Deere stock may not fall sharply. But it will likely trade sideways for the foreseeable future.

Deere Has Plenty of Trade-War Exposure

Over the past year, Deere stock is up 3%, while Caterpillar stock is down over 10%. Meanwhile, so far in 2019, as of yesterday, DE stock had risen nearly 10%, while Caterpillar stock was up less than 5%.

Given those metrics, one would reasonably assume that Caterpillar has far more exposure to trade-war headwinds than DE. But that’s not entirely true.

China, the world’s largest soybean importer, used to buy most of its soybeans from the U.S. But as the U.S.-China trade war heated up in 2018, China started relying more heavily on soybeans imported from Argentina and Brazil. Indeed, China didn’t buy any soybeans from the U.S. during a six-month stretch in 2018

That boycott caused the U.S. to accumulate record soybean inventories. China is slowly starting to buy U.S. soybeans again. But it’s not buying enough of them to meaningfully dent the record inventory levels. Thus, heading into the spring planting season, U.S. farmers have way too many soybeans. That means they aren’t incentivized to plant that many soybeans this season, and that could ultimately prove to be a major demand headwind for DE.

In other words, there will not be adequate demand for Deere’s farming equipment this year unless China buys a ton more soybeans. That’s anything but certain. Consequently, DE stock can be badly hurt by a continuation of the trade war, and those risks don’t seem to be priced into Deere stock.

DE Stock Is Maxed Out

From almost every standpoint, DE stock looks like it is getting ready to reach a ceiling soon.

On the valuation front, CAT stock historically has almost always had a larger trailing price-sales multiple than Deere stock. Every once in a while, DE stock rallies when CAT stock doesn’t, causing DE’s sales multiple to surpass CAT’s sales multiple. That rarely happens (it’s only occurred once in the past five years), but when it does, it’s a leading indicator that DE stock is topping out.

Now DE’s sales multiple is just a fraction below CAT’s sales multiple. As a result, the relative valuation of DE stock looks close to a high point

On the technical front, DE is nearing the top end of its 52-week trading range. The stock has tested these $160-plus highs multiple times over the past year, but it’s never stayed at those levels very long. The Relative Strength Index of Deere stock is also nearing overbought territory, and the stock is about as far above its 50-day moving average as it’s been in the past year.

On the sentiment front, analysts have grown increasingly skeptical about DE stock as it has risen over the past few months. Back in December and January, the consensus, sell-side rating on the stock was “buy.” In February, though, a bunch of “buy” ratings have shifted to “hold” ratings, and now most analysts have “hold” ratings on DE stock.

Overall, it simply looks like Deere stock is getting close to a high point.

The Bottom Line on DE Stock

Deere is a great company. But in light of the underappreciated and misunderstood trade-war risks that DE is facing, DE stock has hit levels which simply aren’t supported by the fundamentals. As a result, DE looks like it’s about to hit a ceiling.

As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.