Oh, Deere

Farming is a deliberate business if there ever was one. Betting on farming-related companies is not.

Shares of Deere & Co. are slumping, falling 9% after the maker of farm equipment stung investors by lowering expectations for the current quarter. But that hasn’t stopped the short-timers in the options market, who are betting that Wednesday’s losses will be temporary.

Can Deere bounce back?
The company said net income rose 22% for the quarter ended April 30, but it expects net income for the quarter ending July 31 of $550 million to $575 million, south of Wall Street’s consensus view of $650 million.

While agricultural demand has buoyed shares of this stock, along with its rivals — they are, after all, the equivalent of those supplying shovels and wading boots for gold prospectors — high materials prices are hurting Deere’s bottom line. The company reported that rising steel prices, as well as shortages for certain components, such as special tires for farm equipment, are hurting margins.

The stock was lately at $81.94 a share, down 9%. But the heaviest activity in the options market suggested investors are betting on a turnaround — if only a brief one. Call options at the $85 strike price (giving the investor the right to buy the stock at $85 at a later date) were very active Wednesday, particularly for the May contract. Those contracts expire at the end of trading Friday, making this one of the shortest of short-term bets.

More than 15,000 contracts changed hands Wednesday, compared with existing interest of 3,400 contracts headed into the day. “With the stock down $8, people are buying calls that expire in 48 hours,” says William Lefkowitz, chief options strategist at vFinance Investments. “The argument is that with a lot of bad news coming out, the stock getting hit, if you believe the stock can rebound it’s a cheap way of taking a shot at it.”

History might be informing that view, as Deere shares gained 96% in 2007, after all. However, more recently, rivals such as CNH Global NV and Agco Corp. saw their shares fall by more than 10% after reporting earnings. The problem? Shares of both names weakened for several days thereafter, suggesting the short-term Deere bet is a long-shot.