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August 13, 2012 / redman59

Earnings Trade Preview: John Deere $DE

John Deere $DE reports 8/15 before market open with traders having 2 days to position for a move.  DE has a history of reporting before the market open. An earnings historical table is below:

Fundamentals:

As seen DE has a history of beating EPS and revenue estimates.  Fundamentally I believe DE to be attractive to money managers on a valuation basis noting its Forward P/E (9.22), PEG (1.14), P/S (0.94).  Also DE has a 2.32% dividend yield that is  historically stable and raises when adjusted.

Industry Competitors:

1) CAT – reported 7/25 beating estimates & noted best quarter in history, lowered guidance noting depressed construction activity due to Eurozone & China but housing coming off lows & improving.  Stock performance gapped up then sold off but has recently recovered that selling and is up near 9% off pre-earnings close

2) CMI – reported 7/31 beating EPS missing revenues, maintained guidance and cited strong profits despite weakened global economy.  Stock performance gapped up with retracement next day and is up near 12% from pre-earnings close

3) AGCO – reported 7/26 beating EPS missing revenues, maintained guidance and cited strong sales of tractors and farm equipment.  Stock performance gapped up then sold off to pre-earnings close and hasn’t looked back being up near 10.50% since that close.

Summary :

My opinion these companies continue to look attractive on a valuation basis including JOY who hasn’t reported.  These names are moving together off lows which can be attributed to the agriculture story (see $CORN).  I believe that the hot agriculture story is going to stick and I have a bullish outlook on these names going forward as they all have been hit on the global growth story but have been revived by the agricultural story and I look for the momentum to continue with some pauses/basing.

Earning Moves:

Summary:

  • Avg move is 2.18% with a 5% outlier when removed results in a 1.70% move
  • Avg Augen StDev move on earnings into the open is 1.33 with no real outliers
  • Current StDev move is 0.95 taking that multiplied by avg Augen StDev move is (0.95*1.33) 1.26pts
  • 1.26pts would constitute a 1.59% move which is below both averages calculated; but the 90 day volatility is at the bottom of its range

Volatility Analysis:

Summary:

  • IV data not able to pull up for 11/23/2011
  • Two huge moves of IV to the upside 8/17/2011 & 2/15/2012 with both moves being over 2.25% downside moves
  • My opinion no real edge in selling the strangle as reward is not worth the risk, rather take a directional bet
  • Avg IV move is 22.72%, removing the two outliers is 11.66%
  • I also took into account the next month IV shift (for Calendar Spread purposes) and those two outliers also effected the next month with the avg IV shift being 4.93% and when the outliers were removed 2.30%

Charts and Technicals (notes on chart)

  • Long-term symmetrical triangle engulfs short-term symmetrical triangle
  • Recent buying volume above 65% average volume (50sma) with lows being at the 50sma and retakes now flattened 200sma
  • Long term support/resistance line around 79.25 , near Fri close, with next resistance area at 82-84 (3-5% from current close)

Trade Ideas:

Given the recent reports of industry competitors and their price action I am bullish on price action going forward for DE.  Even though it has a history of continuously beating estimates and a miss would end that trend, I believe the long-term fundamental story of agriculture will trump any earnings miss (as seen in industry competitors beating EPS missing revenue).  On a volatility perspective, IV is at a historic low here so recent volatility analysis could be overtaken (expected 1.26pts / 1.59%).  I am concentrating on the 82.5 strike as I am expecting a gap to the 82-82.5 level so a minimum of a 3% move.  There are three bullish trades that I like, accepting a 100% loss:

  1. Aug 80/82.5 Call Vertical current price 0.89
  2. Sep 82.5 Single Call current price 1.14
  3. Sep/Aug 82.5 Call Calendar current price 0.64

The Vertical trade is advantageous if we see weird fluctuations in IV as noted above by those 2 outliers.  I prefer these trades when I am not sure on how IV will react.  The Single trade is most risky in my opinion as it will suffer from a drop in IV (even though small) and has the least reward:risk if we do get to that 82 level.  But it also benefits from continued upside.  The Calendar trade has IV risk.  I went and backtested those trades where the IV gained on earnings and the calendar was a loss/small gain even though it went in the right direction.  In both instances they were down moves over -2.25% and if I put a Call Calendar on in the direction of the move it was a loss and a Put Calendar was a small low double/single digit gain (overall disappointing considering the direction was right).  But the calendar trade works great if we take out those 2 IV outliers with a near 80% gain on a touch of 82.

***All data compiled from free resources to include : thinkorswim desktop platform, estimize.com, streetinsider.com, finviz.com

2 Comments

Leave a Comment
  1. Carlo / Aug 24 2012 12:22 am

    It’s me again. Went back and read some older post. How do you evaluate a company fundamentally? I see lots of great stats on finviz (income, forward p/e, peg, sales, cash/sh, book sh, etc) But, I am not exactly sure how these are used to determine overall health of a company. I primary use the charts for trading, but I like the approach you and optionshawk take to evaluate the fundamentals at the same time.

    Thanks

    • redman59 / Aug 24 2012 3:45 am

      No problem and yes FINVIZ is a go-to as they also color code their financials with green being healthy and red being the opposite. When determining value I look at Fwd P/E (not P/E), PEG, P/B and also their P/FCF as this represents true cash. When looking at growth I look at EPS & Sales Q/Q, EPS Next Year, and ROE. Then I’ll look at margins after that but consider them more of a supporting factor to the other metrics with profit margin being the most important in my opinion.

      To gain insight on these, Investpodedia is a good educational sight. What I like about FINVIZ is that it gives a quick reference. Also keep in mind the industry too as AMZN and most tech is a perfect example of a company/industry that is overvalued but alos represent growth more than anything. New issues fall into that camp as well. I like to think of industrials and basic materials where I will look for stocks more on a valuation basis.

      Overall though I am definitely no fundamental intellect but am the guy that knows just enough. Like you I concentrate on the chart more but use fundamentals as a supporting factor.

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