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Aug
1
Jonathan Yates
Will John Deere be the Next Blue Chip Agriculture Stock to Buy for the Long Term after it Falls?
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It has been a difficult summer for stocks in the agriculture sector such as Potash (NYSE: POT),  the world’s biggest supplier of fertilizer, and Caterpillar (NYSE: CAT),  the largest equipment maker in the world.  While each has fallen, previous articles on this site have detailed why both Potash and Caterpillar are solid buys for the long term investor.  John Deere (NYSE: DE) could be the next farming sector stock to fall, creating an opportunity to buy at a discount to profit for the long term.

John Deere reports its earnings on August 14, before the market opens.  Like Potash and Caterpillar, John Deere is down in a year when the Dow Jones Industrial Average (NYSE: DIA) and Standard & Poor’s 500 Index (NYSE: SPY) have both been setting records.  For 2013, John Deere is down by 2.73%. As shown by the chart below, the exchange traded fund for the agriculture sector (NYSE: DBA) is off by 12.67% for 2013 with uneven volume patterns, which is a bearish indicator when an asset is falling in price.

Moreover, the performance of John Deere in recent market action has been much worse.  For the last six months, John Deere is off by 10.63%.  For the last quarter, it is down almost 7%.  It is trading below its 20-day, 50-day, and 200-day moving averages.

That is certainly not a bullish trend, either!

If John Deere disappoints Wall Street with its earnings report, like Caterpillar and Potash, it should be an excellent long term buy for those wanting exposure to the agriculture sector.  For these companies, China and other emerging nations drive the action: that is where most of the world’s population lives, and that is where more are moving up into the consumer class, increasing the demand for farm products to supply a more affluent diet.

As such, John Deere has something to offer to growth, value, and income investors for the long term.

For growth investors, the price-to-earnings ratio is just 10.22. It is projected to fall to 9.64.  The average for a member of the Standard & Poor;s 500 is index is around 17.  As a result, the earnings growth of John Deere is being undervalued.

Value investors are buying the sales of John Deere at a discount.  The price-to-sales ratio is 0.86.  That means that each dollar of sales of John Deere is selling at a 14% discount in the stock price.  As sales growth on a quarterly basis for John Deere is higher than the historic figure, that is a bullish indicator for being undervalued.  The return on equity is very high, at over 40%, making the stock even more of a value play..

Those looking to receive a dividend check in the mail do not have to plow any more ground to unearth a buy!

John Deere has a dividend yield of 2.46%.  The average dividend for a member of the Standard & Poor’s 500 Index is around 2%.   John Deere also a history of increasing its dividend.  With a dividend payout ratio of just 23%, there is ample cash flow to raise the dividend or initiate a stock buyback program to reward shareholders.

At present, the short float for John Deere is 4.20%..  That has more than doubled since February.  Obviously, more and more investors are betting that John Deere will fall even more.  Should John Deere continue to decline, it should be an excellent opportunity to buy shares of a blue chip at a lower cost for the long term, especially with its history of raising the dividend.

 

 



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