Deere Stock Returned Huge Gains for Contrarian Traders in 2017

Positive earnings reactions helped Deere stock climb the charts

by Patrick Martin

Published on Jan 9, 2018 at 11:30 AM

We've been recounting some of our top stock picks of 2017. While Chipotle (CMG) was a big winner on the short side, industrial stock Trinity Industries Inc (TRN) was one of our market-beating recommendations on the long side. Another successful long recommendation we made in 2017 was farming machinery concern Deere & Company (NYSE:DE). Here's a closer look at why we were bullish on DE stock in 2017, and how its year unfolded.

What initially drew us to the equity was its strong second-half performance in 2016, especially after an early November election-related boost was compounded by a stronger-than-forecast fiscal fourth-quarter earnings report. This resulted in a new record high for Deere shares, which also toppled the $98 level -- a previous level of resistance, that now appeared ready to work as support.

At the same time, DE was also heavily targeted by short sellers, with nearly 11% of its available float sold short -- an accumulation of short interest that would take more than nine days to fully cover, at the stock's average daily trading volume. In light of DE's big breakout on the charts toward the end of 2016, the shares were lined up to benefit from bears rushing to buy back their losing bets in order to limit losses.

We also saw that the stock had started to win over some analysts, too, as evidenced by a steady trickle of price-target hikes after DE's last earnings report of 2016. With 11 out of 17 analysts still calling the stock a "hold" or "sell" -- and the incoming presidential administration expected to act in favor of infrastructure-related stocks -- there was ample opportunity for future upgrades to help push the shares higher in 2017.

The potential for an unwinding of pessimism surrounding Deere stock was an ideal scenario for contrarian traders. In 2017, DE took off, establishing a channel of higher highs fueled by earnings-induced bull gaps in May and November, the latter of which propelled the security to what was a new record high at the time. The stock finished higher in 10 out of the 12 months last year, resulting in a 53% year-over-year return -- the biggest of all our 2017 top picks.

2017 Postmortem DE

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