Pullback in Farming Equipment Stocks Offers Trading Opportunity

USDA projects net farm income to grow 4.8% in 2019 despite challenges

Trade-related concerns, along with higher fuel costs and increased crop output forecasts, have pressured farm equipment stocks in 2019. As a result, the group has underperformed the S&P 500 by about 7% so far this year. Despite these challenges, the U.S. Department of Agriculture (USDA) still projects net farm income to grow by 4.8% in 2019.

Stocks within the industry appear well positioned to keep this momentum rolling into 2020 as Washington and Beijing continue to iron out a three-phase trade deal. As part of an initial agreement, China is prepared to purchase $20 billion of agricultural products over 12 months in exchange for punitive tariff removals and increase that amount in future rounds of talks, as reported by Market Insiders in October. Furthermore, the USDA has pledged $16 billion in aid for American farmers affected by the trade war, and that may boost more equipment purchases.

Grassroots demand should also benefit the segment in the year ahead. "We remain bullish on Ag into 2020 as we expect a strong [fertilizer and pest control] application season next year," Citigroup analyst P.J. Juvekar wrote in a client note, cited by Barron's.

Those who anticipate improving industry conditions should add these three leading farm machinery stocks to their watchlist. Below, we review each company's earnings and look at how an early November pullback across the trio presents several actionable trades. 

Deere & Company (DE)

Deere & Company (DE) manufactures and distributes machinery equipment through three business divisions: agriculture and turf, construction and forestry, and financial services. Wall Street expects the farm equipment maker to post fourth quarter (Q4) adjusted earnings of $2.13 per share, which represents a contraction of 7.4% compared to the year-ago quarter. Revenues, on the other hand, are expected to increase 1.4% year over year (YOY) to $8.46 billion. Investors will pay close attention to management's updated outlook on trade uncertainty – an issue that has hurt the company's bottom line this year. Trading at $176.03 with a market capitalization of $55.43 billion and offering a 1.77% dividend yield, the stock has returned almost 20% year to date (YTD) as of Nov. 22, 2019. Interestingly, the shares have jumped 14.16% over the past three months, outperforming both the farm equipment industry average and the S&P 500 Index over the same period by 1.09% and 7.98%, respectively.

Deere shares traded mostly sideways between January and September, apart from steep sell-offs in May and August – two moths that saw an escalation in U.S.-China trade tensions. The stock started to make new 2019 highs in early October but has retraced this month, providing a "buy the dip" trading opportunity near support from the July swing high and 50-day simple moving average (SMA). Consider placing an initial stop-loss order underneath the Nov. 20 low at $169.74 and raising it under each successive higher swing low to let profits run.

Chart depicting the share price of Deere & Company (DE)

Lindsay Corporation (LNN)

Omaha, Nebraska-based Lindsay Corporation (LNN) manufactures and distributes agricultural irrigation equipment and international water efficiency solutions. It also provides road infrastructure products and services. The $944.99 million company delivered a fiscal Q4 earnings surprise of 54%, with the bottom line improving 28.5% on a YOY basis. Robust road zipper system sales within the firm's infrastructure unit contributed to the positive result. However, total revenues shrunk 17.3% compared to the year-ago quarter, affected by a 28% sales decline in the company's irrigation segment caused by business divestitures. As of Nov. 22, 2019, Lindsay stock issues a 1.42% dividend yield and has fallen 7.69% on the year.

The firm's share price has remained range bound throughout 2019 so far. In a sign that the bulls may be preparing to take control of the action, the 50-day SMA crossed above the 200-day SMA in September to generate a "golden cross" – a closely watched technical signal that typically indicates the start of a new uptrend. November's pullback to a crucial zone of support between $86 and $88 provides a suitable entry point for swing traders who want to play a move back to overhead resistance at $97. Think about positioning a stop order around $84 to limit downside risk.

Chart depicting the share price of Lindsay Corporation (LNN)

CNH Industrial N.V. (CNHI)

With a market value of $14.61 billion, CNH Industrial N.V. (CNHI) manufactures, markets, and finances agricultural equipment, construction equipment, and commercial vehicles globally. The machinery maker released in line Q3 earnings of 16 cents per share, although revenues of $6.36 billion for the period slipped 4.9% from the September 2018 quarter due to lackluster performances in the firm's agricultural equipment and construction equipment segments, which saw YOY sales declines of 7.2% and 8.5%, respectively. From a valuation standpoint, the stock trades at an attractive forward price-to-earnings (forward P/E) ratio of nearly 12, well below its five-year average of 16.67. As of Nov. 22, 2019, CNH Industrial shares yield 1.86% and have harvested a YTD gain of 19.56%.

Like the two stocks above, the company's shares have plowed back and forth this year. More recently, the price has pulled back to the $10.75 level, where it finds a confluence of support from a three-month trendline, the July swing high, and the 50-day SMA. Those who buy here should set a profit target somewhere between $12 and $12.50 – an area where the stock may run into significant horizontal resistance. Protect downside by cutting losses if the price fails to hold above $10.50.

Chart depicting the share price of CNH Industrial N.V. (CNHI)
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