Part 5

Deere & Company (DE)

  • First recommended the stock @229, now its 370 =>61.6% return in 3 months

Company Background

John Deere is the brand name of Deere & Company, an American corporation founded in 1837, which is the world’s largest producer of agricultural equipment, manufacturing agricultural machinery, construction, forestry machinery, diesel engines, drivetrains (axles, transmissions, gearboxes) used in heavy equipment, and lawn care equipment. In 2019, it was listed as 87th in the Fortune 500 America’s ranking and was ranked 329th in the global ranking. The company also provides financial services and other related activities.

Deere & Company is listed on the New York Stock Exchange under the symbol DE. The company’s slogan is “Nothing Runs Like a Deere”, and its logo is a leaping deer, with the words ‘JOHN DEERE’ under it. Various logos incorporating a leaping deer have been used by the company for over 155 years. Deere & Company is headquartered in Moline, Illinois.

Current position – Financial Performance & Future Growth Prospects

From a financial standpoint the company posted Q1 fiscal 2021 earnings of $3.87 per share, beating the street’s estimates of $2.10. The reported results also showed a 137.4% increase from the prior-year quarter.

Net sales of equipment operations (Agriculture and Turf, Construction and Forestry) came in at $8.05 billion, increasing 23% year over year. Revenues also surpassed the estimates of $7.05 billion. Total net sales (including financial services and others) came in at $9.11 billion, up 19% year over year.

What’s interesting is that the IL-based Deere is the only agricultural and farm machinery player in the S&P 500 Index. It is the 70th-largest company in the S&P 500 Index with a market capitalization of around $109 billion. The company’s products and machinery are definitely superior to those of its competitors, which has put Deere in a leading and very dominant position in its industry. Most of the machinery in the farm categories comes with advanced features and is better constructed than its competitors, thus it is generally preferred by clients internationally. While Deere has comfortably taken the leader’s spot in precision agriculture, the company also remains focused on revolutionizing agriculture with technology, in an effort to make farming automated, easier and more precise across the production process.

The Agriculture and Turf segment is by far the company’s golden egg even though Deere & Co. has done a lot of work on diversifying its product portfolio throughout the years. This leading segment manufactures farm equipment and related service parts, including tractors, sugarcane harvesters, sprayers, irrigation equipment, and more. Apart from its industrial presence Deere & Co. also manufactures and distributes equipment, products and service parts for commercial and residential use.

One of the first major attempts for the company to build additional revenue streams outside of the Agriculture and Turf segment was back in the 1950s, when the company formed the construction-equipment division, which is currently the Construction and Forestry division. The segment generated revenues of $2.46 billion in fiscal Q1 2021, up by 21% year on year. As the 2nd largest revenue source for the company this division manufactures broad range of machines and service parts used in construction, earthmoving, material handling and timber harvesting. Deere also manufactures and distributes road building equipment through its wholly-owned subsidiaries of the Wirtgen Group.

The company is considered to be a leader in almost every category that it operates in, as its multi-decade history, strong corporate culture, outstanding senior management and last but not least superior products have all contributed to the creation of an exceptionally strong foundation for Deere’s future. The company has a product advantage in most farm machinery categories as its machines come with better features and are better constructed than its competitors. Furthermore, Deere boasts a broad distribution network, which is an essential component for the consistent revenue growth for the company. Deere has also been growing its presence in the field of precision agriculture through various acquisitions like Blue River, NavCom Technology. It’s no wonder that the company is currently the world leader in precision agriculture. Deere’s senior management has stated on many occasions that it remains focused on revolutionizing agriculture with technology, in an effort to make farming automated, easier and more precise across the production process. Notably, Deere spends around 8% of sales on R&D.

Deere also finances sales and leases by John Deere dealers for new and used agricultural, commercial and consumer, and construction and forestry equipment through its Financial Services segment (10% of fiscal 2019 revenues). Net revenues in Deere’s Financial Services division came in at $204 million in the reported quarter, up 49% year on year. The segment’s operating profit came in at $258 million, up 44% year over year. Increased global demand for food, shelter and infrastructure from a burgeoning population will continue to drive Deere going forward.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 12 months has taken the price from the March 23rd lows of 2020 around $105 to the $369 all-time highs in the beginning of March, 2021. This represents an astonishing 251% gain for the stock in less than a year. However, the road to the current all-time highs was filled with many different hurdles along the way as the bulls had to overcome quite a lot of obstacles in order to keep pushing the prices higher. Throughout the last 12 months we have seen 4 larger corrective movements of around 10%, but the uptrend has remained intact. The fact that the economy is slowly reopening and recovering makes the uptrend looking much healthier now than it was 10 months ago. At any rate, DE ’s stock as well as the whole XLI ETF have continued to break high after high and to outperform the broader market. As we have already mentioned in our ETF Correlation Analysis for March the leaders in this ETF, Honeywell International, Boeing, Caterpillar, 3M Company, Deere & Company etc. have been among the major beneficiaries of the cyclical rotation from growth into value stocks that the market has been going under.

We will start buying KEYS at $360, just above the major support where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $345. Our first take profit target is at $415, followed by the next target at $440 where we will be fully closing our positions and collecting the profits.

The stock is currently sitting at $369 and is pushing further into uncharted territory. After breaking above the strong horizontal, psychological and all-time high resistance at $360, in the first half of March, CAT has managed to find a lot of buying interest and it looks like the strong bullish momentum is here to stay as the cyclical rotation will most likely continue in the coming weeks. This most recent price break could be taken as a signal for a potential trend continuation move all the way up towards the next round number of $400. The $360 level has already started acting as a strong support and is expected to limit any future price declines. However, a more meaningful correction should not be completely discarded as a potential scenario as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 12 months it will be more than normal to see such downward corrective movement. However, we believe that the new $1.9 trillion stimulus package passed in the US, will inject a lot of liquidity into the market. We expect most of the big tech names and retail trading favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the SPY and the XLI will definitely perform well in March. In addition to that, following the Gamestop phenomenon retail traders have found that picking the right stocks could be extremely profitable and are now much more willing to look at other sectors apart from Technology. Furthermore, lets not forget that the two ETFs share an extremely strong 91% 10-year positive correlation and if one of the indices breaks its previous all-time highs there is a 91% chance of the other ETF to follow suit, statistically speaking.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, we see that the winners would most likely continue to win. We remain bullish on the DE in the short, mid and long term and believe that any price corrections should be treated as great opportunities to buy this strong performing industrial stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. However, we need to point out that some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are getting close to overbought territory, which might be taken as a short-term positive, by confirming the strong bullish momentum, but it should definitely be looked at with caution from a mid to long-term perspective as it might be indicating that a potential correction lies ahead. The most recent technical break of the prior ATH levels on the price chart has been strongly supported by the daily RSI, as it has continued to push higher, thus moving in a solid uptrend. Furthermore, XLI is trading above its 50 DMA and 100 DMA, which is also clearly showing that the strong uptrend remains in place. As long as DE is trading above $360, we see the stock moving higher. A potential downward break of the above-mentioned support will most likely send the price lower towards the strong psychological and horizontal support range of $315-330.

Acknowledging the fact that we are once again sitting at all-time high levels in a time filled with plenty of uncertainty and high volatility, we would like to point out that buying at these levels would be more suitable for risk-oriented investors, while risk-averse traders should wait for a minor 5-7% correction before jumping back in on the long side. Thus, we are advising our risk-oriented followers to go ahead and start buying the stock as being one of the companies with the highest percentage weight in the XLI ETF right now, we believe that the stock will continue to do well in the coming weeks.

Facebook (FB)

Company background

As we all know, Facebook Inc. is the world’s largest social media platform. The company is the 4th largest holding in the SPY exchange traded fund with a 1.9% weight, which makes its price movement essential for the whole ETF. Facebook’s portfolio of products has substantially expanded throughout the last decade as the company has evolved from a single Facebook app to multiple apps like photo, video sharing and messaging apps like Instagram and WhatsApp. Acquisitions have played a major part in Facebook’s growth initiatives and expansion strategies as both WhatsApp and Instragam were acquired by the company in order to expand its reach and global usage base. Now, along with in-house developed Messenger, these apps now form Facebook’s family of products used by almost 3 billion people on a monthly basis.

Facebook uses metrics like daily active users (DAUs) and monthly active users (MAUs) to measure its user base. As of December 31st, 2020, there are over 3.30 billion people actively using Facebook, Instagram, WhatsApp or Messenger each month and according to Facebook are considered Family Monthly Active People (MAP). Worldwide, there are over 2.80 billion monthly active users (MAUs) as of December 31st, 2020. This is a 13 percent increase in Facebook MAUs year-over-year. Furthermore, 1.84 billion people on average log onto Facebook daily and are considered daily active users (Facebook DAU) as of December 31st, 2020. This represents a 12 percent increase in year-over-year and compares favorably to the 1.66 billion DAU for December 2019. (Source: Facebook 12/2020). A newly introduced but yet a very important metric for the company is the family daily active people (DAP) that measures daily users of its family of products, was 2.6 billion. Facebook is following Apple’s example of trying to create one ecosystem of products and services for all of its users, which is a great long-term growth driver for FB.

Headquartered in Menlo Park, CA, Facebook generated revenues worth $70.70 billion in 2019. Advertisement accounted for 98.5% of revenues. Marketers buy ads that can appear on multiple platforms including Facebook, Instagram, Messenger and third-party applications and websites.

Facebook, thanks to its huge user base gained a significant market share in the advertising space wherein it faces tough competition from Google, Twitter, Amazon and Snapchat-parent Snap.

The company’s major competitors in the messaging and advertising space are: Apple (messaging), YouTube (advertising and video), Bytedance (social media) and Tencent (messaging and social media).

Facebook core app enables people to connect, share, discover and communicate with one other on mobile devices and personal computers. User engagement on core Facebook platform is fostered by News Feed that displays an algorithmically-ranked series of stories and advertisements customized for each user. There have been plenty of new Facebook tools and features that have been introduced throughout the last few months including Facebook Groups, Marketplace, Jobs and Gaming.

Instagram is a community for sharing photos, videos and messages, enabling people to discover interests that they care about. People can express themselves through photos, videos and private messaging via Instagram Feed and Stories.

Messenger helps people to connect with friends, family, groups and businesses across platforms and devices. WhatsApp is a simple, reliable and secure messaging application, used by people and businesses around the world to communicate in a private way.

Facebook also offers virtual reality (VR) products through its Oculus division.

Current Position – Financial Performance and Future Growth Prospects

When we look at Facebook’s most recent Q4 Earnings report for 2020, we could see general strength and overall consistent growth across all of the company’s divisions. The company had managed to not only shrug off the negative impact from the pandemic but it has shown signs of resilience in this tough economic environment announcing double-digit revenue growth for the quarter and better-than-expected user gains. This in turn was one of the major catalysts for the stock’s rally in the first part of the year. However, ever since the stock topped out at $304 per share back in August, 2020 it has been generally moving sideways within the broad but very consistent range of $247-288. Considering the fact that the financial metrics of the company have continued to show internal company strength and overall stability, one could as why then has the stock struggled to move higher. Our analysis shows that one the main reasons for that is the recent news that came out from FB’s biggest competitor – Apple. The smartphone maker from Cupertino, CA informed FB and Google that it is in the process of rebuilding its operational systems in order to limit 3rd party entities like FB and Google to track Apple’s users activity trend. This might have a serious long-term negative impact on FB’s business model as if it loses its ability to track what iPhone users are doing across Facebook’s platforms, that means that the company will lose the potential for monetizing these users.

Another company related risk for FB investors is the fact that Facebook has been put under constant scrutiny from privacy groups and federal agencies around the world for hosting a huge amount of personal data. From a purely financial standpoint FB has done a very good job in sustaining its strong performance. In its most recent earnings report for the fiscal Q4 2020 the company delivered earnings of $3.88 per share, which was 20% higher than the street’s estimate and showed a tremendous 51.6% improvement year over year. Revenues came in at $28.07 billion again surpassing the street’s estimates by 6.2% and also rose 33.2% year over year. Average Revenue per User (ARPU) in Europe, the United States & Canada, Asia-Pacific and RoW grew 27.7%, 29.3%, 13.4% and 11.7% on a year-over-year basis, respectively.

The company is facing an ongoing advertiser boycott over its policing of hate speech, but despite that is still expecting roughly 10% year-over-year revenue growth for Q3 — similar to in Q2.

Facebook is currently facing intense political and regulatory scrutiny over issues ranging from content moderation to alleged antitrust violations. It is also in the midst of an unprecedented advertiser boycott over to its approach to hate speech.

Facebook continues to witness significant traction in online and mobile advertising spending. However, while the online advertising space is growing it is also changing, as there is a new “king” in town when it comes to online ads and that’s – video. The company intends to capture the opportunity presented by ever-increasing video viewing on social media platforms. Online video is the most lucrative component of digital advertising. As video ads generate more revenues than its photo and text-based substitutes, Facebook is trying to incorporate more and more video-oriented content to bring in more ad dollars. The company launched Watch, a dedicated tab for video viewing, to achieve its goal.

The biggest cash cow for Facebook currently is Instagram as it has introduced its ad platform to worldwide advertisers. To attract more advertisers (over 3 million and counting), Facebook has unveiled tools to promote posts and evaluate business performance directly on Instagram. Moreover, the Facebook is also looking for ways to monetize Instagram Stories, and adding the Checkout feature to the platform is a step toward that direction. The feature allows Instagram users to browse and purchase products from 23 top brands in the United States, all within Facebook’s app. Further, solid adoption of the Explore tab, which is used by more than 50% of Instagram users every month, increases the platform’s monetization opportunities. Recently, the company started placing ads on the Explore tab that is expected to drive the top line.

Messenger and WhatsApp are the other extremely prized possessions. Facebook is aggressively working on monetizing the opportunities presented by its subsidiaries. The company is pretty excited as it opened the Messenger app, which has more than 1 billion users, to developers for creating chatbots that would enable businesses to extend customer service and other transactions. Facebook is rewriting the app from scratch to make it the fastest and most secure major messaging platform in the world. It is also working to bring end-to-end encryption and ephemerality to boost user experience.

Technical analysis

By looking at the daily chart, we can see the strong bullish rally that occurred in the March-August period which took the price from the March 18th, 2020 lows around $137 to the $304 all-time highs in back at the end of August last year. This represented an astonishing 122% gain for the stock in just 5 months. However, ever since the stock topped out in August it has been moving mostly sideways in a fairly large but very consistent range. The $245 strong horizontal support level has managed to provide critical support for the stock on few occasions throughout the last 6-8 months, whereas the $290 strong horizontal resistance has proven to be a strong bearish reversal zone, where the price has failed 4 times in the last 6 months. The stock has continued to attract a lot of investors’ attention as it remains the world’s most dominant social media platform with a continuously improving portfolio of services. The way that Facebook has continued to make some of the best acquisitions out there with notable deals like Instagram, Whatsapp etc. under its belt, has turned the company into a social media conglomerate. The stock is a go-to choice for both small retail and large institutional investors looking to add some social media and tech exposure to their portfolios.

We will start buying FB at $270, just above the major support where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $260. Our first take profit target is at $325, followed by the next target at $340 where we will be fully closing our positions and collecting the profits.

The stock is currently sitting at $268 per share, which is 12% below its all-time highs of $304 per share. It seems that the stock has once again found meaningful support around the 245 levels, after the 10% decline that the stock staged in the last 2-3 weeks. The most recent failure of the price to break below the $245 mark could be taken as a signal for a fading bearish momentum signaling for a potential bullish reversal ahead and a general resumption of the long-term uptrend. A more meaningful correction for the stock is not anticipated by us as we believe that the sideways price action that we have seen in the last 6 months has re-balanced the overall positioning in the market and the path of least resistance is higher. At any rate, we must point out that the stock needs to break above the $290 resistance of the range on a daily closing basis, in order for us to confirm that the longer term uptrend has resumed.

However, we believe that the new $1.9 trillion stimulus package accepted in the US, will inject a lot of liquidity into the market, which will be a great short-term positive for the equity market. We expect most of the big tech names as well as other favorites to restore their favorable image among traders and investors in the coming weeks, thus we anticipate that the XLC and the XLK will be two of the best performing sectors in March. While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, the newly formed office in DC, the economic recovery, the post-Brexit economic reality for the UK and EU etc. – and that we could be in for a sideways and choppy price action in the coming months. However, we see that the winners would most likely continue to win. We are bullish on PYPL in both the short and long term and believe that the most recent price corrections must be treated as a great opportunity to buy this strong performing stock at a remarkable discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) have continued to move higher, which further confirms that the bulls are in control at the moment and are signaling that the uptrend might be returning pretty soon. In addition to that, it is important to note the fact that the XLC and the Technology sector as a whole would continue to attract a lot of the investors’ attention moving forward, as communication and technology are everything nowadays and the companies in this space are the ones shaping up our future. This makes us optimistic for the future performance of FB as it is the stock with the highest percentage weighting in the XLC – 19%. The stock is also the 4th largest position in the SPY ETF, which we also see moving higher in the coming weeks. Our analysis shows that as a result of the great leadership performance by the senior management of the company and the phenomenal fundamental positioning of Facebook, the stock will be able to hold its ground better than some of the other stocks out there in the event of an unexpected correction, and it would also significantly outperform the broader market once the uptrend resumes.

Acknowledging the fact that we are in a position to buy at an over 12% discount from the all-time high levels, we would like to point out that buying at these levels would be suitable for both risk-oriented investors as well as risk-averse traders. Thus, we are advising all of our followers to look at the 250-260 range for a potential long entry on the stock

Sincerely,

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