Deere dips remain buying opportunities

Traders who think they know the agriculture industry better than the world’s biggest farm equipment manufacturer keep selling Deere (DE, quote) stock. Their ‘deleveraging’ may be your opportunity.

Image courtesy HCQ: just lifted its guidance for its 2012 results yet again and now expects profit for the year to be $70 million higher than it did back in February.

And yet the shares have sold off 4.7% since the news hit the market yesterday morning.

This is a classic example of perfectly good — even great — stocks being thrown out in the rush to liquidate portfolios in a world seen as increasingly risky.

It’s also an example of the flaws in the binary “risk on / risk off” approach to the markets.

By definition, risk is not a binary all-or-nothing factor in investment decisions. It’s a continuum of probabilities, and smart investors build portfolios to get optimal exposure to the good outcomes while minimizing or hedging the impact of the bad ones.

It’s alright to incrementally adjust your risk profile to reflect a macro shift in the global environment, but once you’ve adjusted it, it stays in place. It doesn’t swing from zero to 100% risk or from “off” to “on” like a light switch.

But as long as other traders are acting that way, the rest of us get opportunities like DE. Right now, DE shares are down a stunning 17% from the $88 to $89 range they were in back in February.

Back then, we were looking at full-year earnings of maybe 8 penny a share less than what DE management is confident they can deliver now.

Is that extra 8 cents worth a 17% sell-off? Or do traders know something more about the global food markets that Deere, with its global tractor sales network, hasn’t seen?

If DE is that unaware of what’s going on in the global food market, then sure, sell the shares. But if the market is the one that’s off base, this looks like an entry point.

Leave a Reply