DE Follow Up

Plus: SII and UNP Updates

By Bryan Bottarelli
Wednesday, February 13, 2008 11:03 AM EST
Wed, 13 Feb 2008 16:03:00 GMT

PLAY: Sell your SII March 60 calls (SIK CL) at or above $3.20, good for the day.

Dear Bottarelli Research Member,

Today is yet another example of why I prefer locking in profits prior to earnings reports. This morning, John Deere (DE – NYSE) reported stellar numbers across the board.

The world’s largest agricultural machinery maker reported a 55% profit increase, earning $369.1 million ($.83 per share) versus $238.7 million ($0.52 per share) one year ago. At the same time, revenue also increased 18%, going from $4.43 billion last year to $5.2 billion this year. Since the analysts at Thomson Financial expected earnings of $0.78 per share on sales of $5.07 billion, DE beat both of these numbers. What’s more, Deere said that Q1 sales outside of North America jumped a whopping 37%, quadruple the sales in the United States and Canada. Stellar!

DE

But in typical Wall Street fashion, shares of DE are trading lower today — proving that you can never predict which direction any stock will move on earnings day. The only thing I can attribute the downside do is that Deere expects earnings between $700 and $725 million in the second quarter, and this projection came in short of Wall Street’s estimate of $735 million. So you have Wall Street selling off DE because revenues that they haven’t even earned yet look to come in a measly $10 million short of expectations. It’s a ridiculous reaction, but that’s how Wall Street operates.

This is why I always prefer locking in profits leading up to an earnings report. Sure, you might miss out on an explosive upside move, but you can also avoid these irrational and unexplainable downside moves. And to me, hitting consistent winners (albeit with small percentage gains) is always the better wealth-building proposition.

Looking at our current positions, I’d like to use today’s upside pop to close out our SII March 60 calls (SIK CL). As you know, this position has moved all over the map, and today the stock has recovered all of yesterday’s bogus downgrade from UBS. As I write, the calls that we entered for $3.20 have traded as high as $3.20, so let’s take this minor loss (accounting only for commission fees) and close out the position now.

SII

PLAY: Sell your SII March 60 calls (SIK CL) at or above $3.20, good for the day.

On the other hand, the timing might be getting close to adding to our UNP March 130 Calls (UNP CF). As you can see from the chart, the stock may decide to re-test its 50-day moving average, and if it does, it would be advantageous for us to add to our upside call position.

UNP

After all, the S&P railroad sub-index has a trailing 12-month price performance that’s in the top 10% of all S&P sub-indexes (which include the S&P 500, S&P MidCap 400, and S&P SmallCap 600). Through February 8th, the railroad index has increased 4.9% versus a 9.1% decline for its benchmark index. And during 2007, the railroad index gained 19.5% compared to a benchmark index gain of only 3.2%. So as you can see, the rails are gaining some strong momentum, and from the looks of the UNP chart, I think that this upside will continue. I’ll continue to watch UNP for a strong second-entry point.

I’d also like to enter another downside put play, similar to the trade we made yesterday on Research In Motion (RIMM – NASDAQ). Should anything come up, you’ll be the first to know. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

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