Heavy equipment powerhouse Deere is in a cup-with-handle base near a buy point. It is today's IBD 50 Stocks to Watch pick.
The manufacturer holds the top spot out of seven stocks in the Machinery-Farm industry group, which is 44th out of 197 IBD groups. The subsector has moved up from 83rd just four weeks ago.
The Moline, Ill., company is also in the IBD Big Cap 20 list. It is best known for powerful farm machines but also manufactures construction, forest, lawn, and sports-turf equipment.
Deere Stock In Base Within 2% Of Buy Point
Deere shares have rallied within 2% of the 406.12 buy point of a 29-week old cup-with-handle base. Daily volume has traded above the 50-day moving average in the last week, highlighting growing interest.
Deere stock rose for a few sessions after reporting fiscal Q3 earnings on Aug. 19 and then pulled back to form the cup's handle. Shares have now found support at the 21-day exponential moving average.
The relative strength line just hit a new high on the MarketSmith weekly chart, as indicated by the blue dot at the end of the line.
Shares hold a 90 Relative Strength Rating, meaning they have outperformed 90% of stocks that IBD tracks.
Will Deere Earnings Impress?
Deere's Q4 earnings release is scheduled for Nov. 23.
Analysts expect the company to report a profit of $7.13 per share on $13.4 billion in sales. If met, it would mark a 73% EPS surge, compared to the same quarter last year.
Consensus also expects 20% annualized growth for fiscal year 2022 and 13% for 2023. It has booked a 36% annual EPS growth rate in the last three years, according to IBD Stock Checkup.
The company missed Q3 earnings by a wide margin on Aug. 19 and lowered its full-year profit forecast. Management spelled out both headwinds and tailwinds in the earnings release.
"We're seeing some modest improvement in the supply base, but overall it's still very fragile and deliveries are still choppy," said Rachel Bach, manager of investor communications, in a conference call.
"We fully expect to produce more large ag equipment next year than we did this year," added Cory Reed, Deere's president of production and precision farm equipment.
Sales have been erratic, with a disappointing 5% growth rate in Q1, strengthening to 11% in Q2 and 22% in Q3.
EPS has followed the same trajectory, falling 25% and then rebounding 20% and 13% through the third quarter.
Strong Fundamentals; Commitment To Diversity
Deere has earned a superior 97 Composite Rating, respectable 94 EPS Rating and top-notch "A" SMR Rating. The SMR Rating combines three gauges: sales growth, profit margins and return on equity (ROE). The rating goes from "A" to "E," with "A" being the best and "E" the lowest.
The 38% return on equity is well above the 17% minimum goal in the CAN SLIM investing strategy.
The company has committed $500 million over the next three years to find and grow relationships with underrepresented businesses. The pledge strives to create a more diverse and sustainable supplier network within the agriculture industry.
As part of its commitment, Deere announced on Oct. 31 it will be entering as a lead investor in Advantage Capital's Empower the Change growth fund. The fund provides entrepreneurs of color access to capital to develop their businesses and help create community wealth.
Funds Buy Deere Shares
Mutual funds own 39% of Deere stock but have trimmed their holdings, with 3,132 positioned in September, down from 3,192 in June.
The CAN SLIM strategy looks for increasing institutional ownership for conviction, as big money managers have the ability to move shares on large purchases. So this represents a modest red flag.
