Deere (DE) has bounced 4.7% this week–but JPMorgan’s Ann Duignan warns that its strength has little to do with changing fundamentals and everything to do with short covering. She explains:
Andrew Mitchell for The Wall Street Journal Deere’s stock was up 3.3% yesterday vs. S&P 500 up 0.2% as short covering began in earnest as several catalysts were thrown around during the course of the day. Catalysts included: 1) the notion that Section 179 has bi-partisan support and may be re-enacted in the near term (we disagree as a Republican Senate and House may mean permanent tax changes, a lengthy process); 2) corn has hit its seasonal low and futures
are improved since Friday's WASDE report (we agree though the weather is expected to improve and November WASDE usually sets the low); 3) Deere outperformed the industry in Brazil in September and the NA AEM data was better than expected—this combination may provide an upside surprise for Deere FQ4’14 earnings. In our view, the short covering may continue into the company's earnings report on November 26. However, the fundamentals have not improved, with wet weather in the Midwest
adding to farmer woes as the cost to dry the crop will rise, on top of everything else. We remain underweight Deer into its earnings release as FY'15 is likely to be challenging.
Shares of Deere have gained 0.5% to $84.71 at 10:38 a.m. today, while Agco (AGCO) has jumped 1.4% to $44.25.
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