Bearish Sentiment Builds on Deere Before Earnings

DE put buyers have been busy in recent weeks

Aug 14, 2019 at 11:31 AM
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Deere & Company (NYSE:DE) is trading down 2.4% today at $143.61, as the broader U.S. stock market sells off on recession worries. A bear note from Deutsche Bank is only adding to DE's woes, with the brokerage firm slashing its price target on the stock to $155 from $163 -- a slim 7.5% premium to current trading levels.

Diving deeper, Deutsche Bank cited Monday's "disappointing" World Agricultural Supply and Demand Estimates (WASDE) report. Additionally, the brokerage firm said a cautious tone from management following the company's fiscal third-quarter earnings report, due out before the open this Friday, Aug. 16, could spark downward revisions to 2020 estimates. Most analysts remain upbeat on DE stock ahead of earnings, with 10 of 15 maintaining a "buy" or better rating, and the consensus 12-month price target sitting up at $167.06.

Options traders, on the other hand, have been unusually bearish toward Deere in the week's leading up to the company's quarterly results. At the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), DE's 10-day put/call volume ratio of 2.48 ranks in the 100th annual percentile, meaning puts have been bought to open over calls at an accelerated clip.

Those purchasing short-term options are finding relatively rich premiums at the moment, per the stock's 30-day at-the-money implied volatility (IV) of 38.9%, which registers in the 93rd annual percentile -- not too surprising heading into a scheduled event like earnings. Meanwhile, Deere stock's 30-day IV skew of 18.4% ranks in the 97th percentile of its 12-month range, indicating DE puts have been more expensive relative to calls, from an IV standpoint, just 3% of the time over the past year.

The equity has a history of positive earnings reactions, closing higher the next day in five of the past eight quarters, although the two most recent reactions have been negative. DE shares have averaged a single-session post-earnings move of 3.9% over the last two years, slimmer than the 7.9% swing the options market is pricing in for Friday's trading.

On the charts, Deere stock has been making a beeline lower since its late-July 17-month peak at $171.22, down 16%. In fact, the shares have had just three positive closes so far in August, and have already racked up a month-to-date deficit of 13.3%.

de stock daily price chart on aug 14


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