So maybe the trade-war is only put on hold, but as we stated in our article on trade tariffs here , the initial threats of tariffs this was simply positioning. Was there a signal that an agreement was coming to an end? Clearly the market was signaling a reversal BEFORE the news was released on Trade. Whether this was insider trading, leaked to large investors before hand, or other “whale manipulation” is insignificant. The charts were telling of a potential rally before the announcement. So how does this affect our positioning moving forward?
As Marc posted yesterday, prior to the announcement, the S&P had turned bullish. You can read the article on the summer rally here. This article is intended to take a look at where we can add to our core stock holdings benefiting from a potential outcome.
Clearly the US is not going to be making T-shirts and selling them in China. We are also not going to be making plastic toys, and other cheap inexpensive manufactured items which China clearly has an advantage with cheap labor. The only way to really reduce the trade gap is through energy and agriculture. So does this mean it’s time to buy soy bean futures? Well surely any increase in agriculture will lead to more farming and oddly enough one holding of ours was up nearly 6% on Friday and that holding was John Deere.
I have not mentioned John Deere yet, though it is in our portfolio as an alternate to Caterpillar. The reason I like Deere over Cat is for various reasons.
- They are the clear leader in Agricultural and Forestry Equipment (Best in Breed)
- They acquired German heavy equipment manufacturer Wirtgen to add to Deere’s construction portfolio specifically Road Construction. (Infrastructure Bill)
- The acquisition also expanded their global reach as Wirtgen sells products in more than 100 countries. This provides increased global reach of their agriculture equipment.
- Farmers love John Deere. Name brand recognition is clearly an advantage, and go to any farm town diner and you will see John Deere merchandise.
- Deere is diversified in agriculture, forestry, construction, and with their acquisition of Wirtgen infrastructure (road and pavement). Caterpillar is tied closely to construction, infrastructure, mining, oil and gas.
To be clear Caterpillar does make agriculture and forestry, products, both make marine products and power generation equipment. They are small percentages of their portfolio none the less. 2.2 billion of Cats Q1 revenue was from construction, mining, energy and transport with 57 million from others. Deere retains the majority of its revenue in agriculture / turf, forestry, and construction, with Wirtgen expected to add over billion annually to road construction revenue, more than doubling their current construction and forestry division combined. This does not include additional synergies from the merger.
Anytime you have a name brand company going after market share of a company, one has room to growth, the other lots to lose. Look no further than Amazon. Not that John Deere is Amazon but when Amazon goes to compete in a space others have much to lose, and this situation is no different.
Technical: Long term
Deere just completed a 3rd wave impulse move in a multi year cycle. Though the retrace was shallow Deere has broken back into the longer term trend channel and is poised to move higher. The 6% increase on Friday was a clear signal something was happening, and with a trade deal appearing to be more within reach Deere has a lot to gain.
Initial resistance is found at the 157 level and a shallow pullback to retest the channel is likely, but once resistance is broken the initial target of 193 is the first area to look to take profits from a position or swing trade or to implement a defensive options strategy. In the longer term 259 to 295 are preliminary levels to look at before a major correction.
As this is in our core portfolio we will provide updates as adjustments are made due to market conditions. This is a broad roadmap and not a GPS. Markets change and we must as traders and investors adapt to market conditions as they happen.
If you are looking to add some exposure to a potential increase in agricultural exports, or an infrastructure bill for the longer term, maybe it’s time to “run like a deere” and add a small position. Deere in our opinion is better positioned than Caterpillar for longer term growth and of course dividend revenue. This is one of three stocks that I personally have on auto investment with the other two being Marathon Petroleum and Exxon Mobil of which both would also benefit from a trade deal with increased oil exports.
Disclosure: Long: John Deere, Marathon Petroleum, Exxon Mobil