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Michael Fowlkes' Insights

Options and ETF Analyst Writer
Michael Fowlkes
Author Bio

February 11, 2013 - How To Play John Deere's Upcoming Earnings

While a lot of investors use Alcoa (AA) as the bellwether stock to get a clearer picture of the overall economy, I prefer to use another company? John Deere (DE). It just makes sense that John Deere would give a good insight into the economy because when the economy is good we see upticks in construction spending and farming.

Not only can John Deere gives us a good insight into the U.S. economy, but its strong international presence gives a clear picture on the global economy as well. Last year the company turned 175 years old, proving that it can survive through any economic environment.

The global economy, with the exception of a couple countries in Europe, has been slowly recovering from the recent financial crisis, and we expect to see this trend continue through 2013. John Deere will be a major beneficiary of the recovery since there was a lot of construction work that was postponed during the crisis that now needs to be completed.

Our initial impression of John Deere is usually based on its farm equipment, but it is a major player in the heavy truck and construction equipment industry as well, which works to its advantage as global construction spending picks up.

In addition to the short-term strength of the company due to the improving global economy, the company also has very good long-term prospects due to population trends. Consider that the world currently has around 7 billion people, but that number is expected to jump to 9 billion by the year 2050. These people will need food, so farming will be even more important than it already is. These farmers will need additional machinery, and John Deere will be there to provide it.

We are also seeing a shift in the global population to cities. It used to be that more people lived outside of cities than within them, but in 2010, that changed, with over 50% of the world's population living in cities. That trend is expected to continue, with an estimated 70% of the world's population inhabiting cities by 2050. Accommodating so many will require huge expenditures on infrastructure, and once again John Deere will be there to provide the machinery.

John Deere will be reporting its fiscal first quarter results before the opening bell on February 13, with analysts calling for 6% earnings growth, and around a 10% jump in year over year revenues.

So how to play the company's upcoming earnings?
While we believe that John Deere will indeed post strong numbers, we are aware that certain pockets of weakness in Europe could put a damper on the quarter. A great way to play the upcoming earnings report is with a hedged position in Market Vectors Agribusiness ETF (MOO).

John Deere represents 6 percent of the ETF, and is its fourth largest holding. While 94% of the value in the fund comes from companies other than John Deere, good news for John Deere is likely to be seen as good news for the others.

Because of this, making a play in MOO is an indirect trade on DE, but the diversity of the ETF will help to shield our investment in the event that DE's numbers disappoint. We could also set up a hedged position on MOO, allowing us to build in a little downside protection in case MOO goes against us.

A nice hedged trade on MOO would be the May 52/54 bull put credit spread. In this trade, you would sell the May 54 put while buying the same number of May 52 puts for a credit of 30 cents. This trade has a target return of 17%, which is 67% on an annualized basis (for comparison purposes only), and the trade has 4% of downside protection.

 Chart courtesy of

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