Deere Gets Plowed
Once again it was “name that tune” for another company that reported a solid quarter yet was cautious when giving future guidance. Sometimes Wall Street just doesn’t get it and they punish a stock for all the wrong reasons. What gets me is that the Street should get this by now and reward companies for their solid earnings and worry about future earnings in three months.
Of course, the market never listens to anything which creates exciting opportunities for those of us who aren’t afraid to swim with the sharks. One such stock that got hammered yesterday based on the aforementioned comments was Deere (DE, $81.25, down $8.94).
The company is center stage when it comes to business within the Agricultural industry. Given the increase in demand for equipment across the globe to work the land, Deere has been one of the industry standards for years. The stock was within spitting distance of its 52-week high ($95) and was poised to crack that level when it announced earnings. Here’s why it is always so risky to buy call (or put) options right before an earnings announcement.
Although the stars were aligned for Deere to break triple-digits, the stock fell 10% and any out-of-the-money May calls you may have bought are pretty much worthless right now. Now, this is not to say you can’t buy options after an earnings announcement. Let’s look at the numbers first.
Deere earned $764 million, or $1.74 per share, a 20+% increase versus the same quarter last year. Sales came in a little over $8 billion led by a 34% increase in Agricultural sales. Bingo, there’s our growth driver. Deere confirmed its outlook for 20% growth for the quarter and for the year and that’s saying a lot. However, in the overall scheme of things their numbers were short of Wall Street’s expectations by a penny. The interesting thing was that there was basically twice as much call action in the May and June options than puts.
Any action in the May options is just too extreme to take as the battle line will be the May 80 call (DEEP, $1.85, down $8.95) or the May 85 call (DEEQ, $0.20, down $6.20) strike price on where the stock may end up. (I told you owning these calls were risky!). There was also plenty of action in the June 90 calls (DEFR, $1.15, down $4.55).
Deere could make a slight rebound on Thursday but if not key support levels will be at $79 and then $76. If Deere continues its slide, $70 would be the last line of defense before the stock really breaks down. Demand for farm equipment isn’t going away just like that and the increasing demand for food and other farm products isn’t going away overnight either.
Let’s see where Deere is in a month or so and whether or not Wall Street oversold the stock. Carl Icahn anyone? (joking).
Rick Rouse
Rick@OptionsMentoring.com