“The problem you have with cyclicals is that they look really, really, really look expensive at the trough and they really, really, really look cheap just past the peak,” Hedgeye Industrials analyst Jay Van Sciver said on a recent institutional research call. “That’s why they’re such easy value traps to fall into.”
Van Sciver thinks agricultural equipment manufacturer Deere (DE) is just such a value trap. In the video excerpt above, he puts the agriculture cycle into perspective. Van Sciver pulls up a chart of real investment in agricultural machinery, which is down -38% from the peak.
Is the cycle trough in?
“You have to look at a longer-term sales chart,” Van Sciver says. “Sure real investment is down -38% from peak but realistically it’s still up +65% from what any reasonable person would identify as a trough which is the late 90s.” That was when the ag equipment manufacturers benefited from a stronger dollar, an aging fleet of existing machinery and thus a durable bottoming in real investment.
This isn’t a good sign for Deere’s stock. Van Sciver runs through the three bullets that strengthen his short thesis:
- Disappointing Guidance – we expect management will report disappointing guidance for fiscal year 2017.
- Wall Street Complacency – consensus is applying “trough multiples,” numbers that imply Deere’s cyclical business is bottoming out. It’s not.
- Short Squeezes – DE stock is up almost +19.6% as shorts have been squeezed, with the likelihood of a miss rising now is the time to short.
