Commodity prices are surging. But rather than recommending a
play for this week's trade, I'm intrigued by a stock that not only
benefits from strong commodity prices, but also more profits for
And with farmers seeing fatter profits from their crops, many are
taking the money and putting it into new farm equipment.
According to the Association of Equipment Manufacturers, September
sales of row-crop tractors increased by +46.9% from August, while
four-wheel drive tractor sales rose +20.5%.
Because of this, shares of
-- the world's largest manufacturer of lawn and farm equipment --
Deere estimates that total farm income in the United States will
increase by at least +15% in 2010 to $81.5 billion, compared to
$70.9 billion last year.
This revenue growth has been -- and will likely continue -- to
drive shares of Big Green higher.
In the October 18th trading week, the stock hit a new two-year high
at $77.72. A small shelf of resistance has been established at this
level. DE is approaching its upper Bollinger band, which intersects
at $78.75, and the stock appears ready to challenge resistance and
If this resistance is broken, DE could be on target to reach its
2008 peak of $89.75.
DE has been in a major uptrend since hitting a low of $23.55 in
March 2009. Since July 2009, the rising 40-week moving average has
mirrored the uptrend line.
In June 2010, an accelerated uptrend line formed off the stock's
$53.47 low. DE is currently well above this accelerated uptrend and
rising. The rising 10-week moving average has mirrored the
accelerated uptrend since July, when it crossed above the 30-week
Key support lies just below $67, around the intersection of the
30-week moving average and a support level tested several times in
July and August of this year.
The indicators are bullish.
is on a buy signal. The MACD histogram is in positive territory.
Relative strength index (RSI)
is in a strong uptrend and rising. At 70, it has just become
overbought, but strong stocks can stay overbought for long periods.
, although overbought, is on a buy signal.
Fundamentally, the iconic maker of green and yellow farm tractors
shows solid revenue andearnings growth.
In August, Deere reported upbeat third-quarter results, for the
period ending July 31st, 2010. Because of strong North American
equipment sales, revenue rose +16% to $6.84 billion, from $5.3
billion in the year-ago quarter.
For the upcoming fourth-quarter, to be reported November 24th,
analysts expect Deere's revenue to increase +31% to $6.2 billion,
from $4.7 billion in the year-ago period.
Based on rising commodity prices, the farm equipment maker projects
full-year 2010 revenue to increase +12.2% to $23.3 billion,
compared with $20.8 billion in 2009. By 2011, analysts project
revenue will increase another +9.6% to $25.5 billion.
Theearnings outlook is equally upbeat.
With increased demand for farm equipment, Deere reported a strong
third-quarter.Earnings rose +45.5% to $1.44 from $0.99 in the
For the upcoming fourth-quarter, the company expects higher R&D
and raw material costs to impactearnings . However, analysts
believe results will still be incredibly strong, withearnings
quadrupling to $0.92 from $0.23 in the year-ago quarter.
For the fiscal 2010 year, analysts projectearnings will nearly
double from $2.81 last year, to $4.48 this year. Latin American and
North American demand for large farm machinery is expected to drive
demand. This demand is expected to continue into fiscal 2011, where
analysts expectearnings to increase another +14.1% to $5.11.
Action to Take -->
Based on Deere's solid growth outlook and current technical
strength, I recommend going long on the stock.
My target is $89.74, just below the stock's 2008 high. My stop-loss
is $66.44, just below support and the current intersection of the
30-week moving average.
Based on Friday's closing price of $77.25, this trade would stand
to make as much as +16.2%.
[To find out how to get a free trade recommendation delivered to
your inbox before the market opens each week,
-- Dr. Melvin Pasternak
Dr. Melvin Pasternak is one of the most experienced market
technicians in the nation and Chief Trading Expert behind
Double-Digit Trading. With more than 25 years
experience... Read more.
Disclosure: Neither Melvin Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.
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