Agricultural equipment icon Deere & Co. (NYSE: DE) is scheduled to step into the earnings spotlight next Wednesday, August 13. Ahead of the firm's third-quarter report, analysts surveyed by Thomson Financial are expecting a profit of $1.37 per share. During the previous four quarters, DE has managed to meet or exceed Wall Street's expectations three times; during its second-quarter report, released in May, the company fell short by one penny per share. At the time, Deere warned that rising material costs could put a dent in third-quarter and full-year earnings.
However, it seems that some speculative investors have a short memory where Deere & Co. is concerned. Option activity on the stock is leaning distinctly bullish ahead of earnings, which could set the stage for a sharp downside move in the event of another profit miss.
The International Securities Exchange (ISE) reports that DE boasts a 10-day call/put ratio of 5.80. This data, which measures buy-to-open activity among retail-level investors, reveals that traders have purchased nearly 6 times more calls to open than puts on DE during the past couple of weeks. According to the ISE, option activity on the stock has not been more bullishly skewed at any other time during the past year. That's a rather bold optimistic bias, considering the stock has shed 28% year-to-date.
The weakness in DE shares started in April, after the security bumped into double-top resistance near $95. As a result, it's now looking up at some troublesome technical resistance levels. The shares closed July south of their 20-month moving average, marking their first such monthly finish since October 2005. This suggests that the equity's previous, long-term uptrend could be breaking down. On a shorter-term basis, the stock has been smacked lower by its descending 10-week moving average since early May (just ahead of its second-quarter earnings miss).
With this lackluster price action in mind, it's interesting to note that analysts' average 12-month price target on DE is $90.75. This consensus estimate represents a premium of about 36% to the stock's closing price on August 7. Should the company unveil less-than-impressive earnings next Wednesday, or issue another shaky forecast, it could be slapped with price-target cuts from once-bullish brokerage firms. Any negative notes from analysts could draw selling pressure to the shares.
Meanwhile, skeptical short sellers have already raked some of their profitable positions off the table. Short interest fell by more than 4% during the most recent reporting period, which may have helped contribute to a minor bounce in DE during the past few weeks. Following this decline, shorted shares now represent a slim 2% of the stock's float, an accumulation that represents about 1.5 times DE's average daily volume. This leaves the equity with a rather thin amount of sideline cash to fuel a rally in the event of better-than-expected earnings.
Overall, it seems that bullish sentiment is unreasonably inflated toward Deere & Co. ahead of its third-quarter report. Considering the company's previous warning about its full-year profits, as well as the security's unimpressive price action, I'd like to see more pessimism from investors and analysts alike. As it stands now, the high levels of optimism create a situation where any hint of weakness in DE's report could spark an unwinding of bullish bets, which could exacerbate the equity's slide down the charts.
Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.
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Reader Comments (Page 1 of 1)
8-08-2008 @ 3:30PM
jamie said...
Really? Looking at a sharp downward decline after earnings? Looking at the fundamentals, the company would have to lose money this quarter to warrant any more of a decline. This stock is worth so much more.