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Deere: Bucking the Trend
10/10/2013 8:00 am EST
Since 2007, we had an undervalued market, as measured by the standard averages. I no longer think this is the case. Fortunately, however, we are not buying based on averages, notes Russ Kaplan, editor of Heartland Advisor.
We are buying individual companies and there are still many which we think qualify as buy candidates. Because of this, I do not recommend changing strategies. We do, however, see the need to be much more selective.
I first recommended Deere & Company (DE) in 1998. Since then the price has more than doubled and the dividend has been above average. So why buy it now?
I look for a price which is below intrinsic value (how much the company is really worth). This is the case with Deere, since its intrinsic value has grown more than the price at which the stock is now trading.
Back in 1837, when the Industrial Revolution was starting, and agriculture was moving beyond the horse and wooden plow, Deere was established. Their first invention and product was the steel plow, which ensured improvement for planting deeper rows.
Since then, its technology has always kept pace with the times, even inventing new innovative machinery to continue to revolutionize the agriculture industry. Deere's Web page shows a stunning display of new products to be presented in 2014.
What makes this possible is that the company devotes 4.3% of its income to research and development. In addition to a large presence in agriculture, today Deere is into industrial equipment, plus lawn and garden equipment.
Due to the world economic downturn, Deere has declined, from a price of almost $100 per share, to its current price of around $83 per share. I believe this is an overreaction due to the strength of its finances and its profitability (44.8% return on investment) despite economic hard times.
Samuel Allen, who has been with the company since 1975, heads Deere. He owns 186,374 shares of Deere stock. I interpret this as a continuation of the company's fine products and new innovations over the last 176 years. Allen has skin in the game.
If you don't own any Deere stock, now is the time to take the plunge. If you already have some, this is a good opportunity to buy more.
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