Tom Armistead

About the Author Tom Armistead

I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to invest very profitably in a rising market. I also did articles on individual stocks, many of which contained insights not available elsewhere. Finally, I wrote a number of thoughtful articles critical of financialism and the lack of ethics on Wall Street. I do not post for compensation, as I am concerned that editorial policy encourages and pays a premium for articles that invite the reader to speculate on the short term movements of microcaps, penny stocks, and controversial issues. The best way for me to monetize my insights is to invest accordingly. As a retail investor, I don't give investment advice. I write about what I'm investing in, and the thought process involved in decision making and stock selection. Hopefully some of what I write is of benefit to others, by sharing my experience as I interpret it and helping them improve their investment thinking and process.

Deere & Company (DE): Goldman Suggests Seasonal Play, My Thoughts On Their Suggestion

 

  • In case you missed it, here is a link to what Goldman Sachs is saying about Deere & Company (NYSE:DE). Briefly, they see a strong pattern of seasonal declines and suggest buying puts in the expectation that the stock will go down during the summer months.

    Anything they say is interesting, but like many others I take it with a grain of salt. I do not trust them and I verify before doing anything.

    Schwab has a Ned Davis seasonality report that covers the period from 1972 to the present for Deere, and verifies serious underperformance compared to the S&P 500 for the months of June and July, followed by a recovery and outperformance into the end of the year. That’s the seasonal pattern.

    I’m long Deere, and updated my valuation. Using 7 year average EPS, to include guidance for fiscal 2015, and weighting recent years more heavily than the past, I arrive at projected E7 of $7.88. That’s normalized earnings, by my methods. Applying a PE7 multiple of 15 for a high quality cyclical, shares are worth $118, quite a bit more than current prices in the $92 area.

    So what about the seasonal dip? I’m not a fan of paying good money to buy puts on an undervalued stock. I just don’t like it. As it turns out, Deere dipped last year, and I did a vertical call spread on it as a way of catching the falling dagger.

    Here’s the trade:

    When the trade was opened, Deere stood at $84.49. By October 3rd, when I rolled the lower leg down, it was at $82.16. By December 19 when the options expired, shares were at $90.10. It’s nice to make $550 dollars, particularly at an IRR of 226%.

    My basic position here is a LEAPS covered call: long Jan 2016 75 calls and short Jun 2015 100 calls. But if Deere dips according to its usual seasonal pattern, I will do the vertical call spread again.