Commodity prices are surging. But rather than recommending a pure commodity 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 farmers.
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 Deere (NYSE: DE) — the world's largest manufacturer of lawn and farm equipment — are surging.
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 move higher.
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 moving average.
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. MACD 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.
Stochastics, although overbought, is on a buy signal.
Fundamentally, the iconic maker of green and yellow farm tractors shows solid revenue and earnings 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.
The earnings 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 year-ago period.
For the upcoming fourth-quarter, the company expects higher R&D and raw material costs to impact earnings. However, analysts believe results will still be incredibly strong, with earnings quadrupling to $0.92 from $0.23 in the year-ago quarter.
For the fiscal 2010 year, analysts project earnings 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 expect earnings 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%.
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– 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.