Apple (ticker: AAPL) may taste delicious to its shareholders. Alphabet (GOOG, GOOGL) may ring up profits A to Z. Amazon.com (AMZN) may be queen of the investment jungle. But do any of those bright shining companies have paint colors named after them?
Deere & Co. (DE) gave us John Deere green, while Caterpillar (CAT) lends its moniker to a bright shade of yellow. You can buy the enamels from Rust-Oleum for about $40 a can, by the way. Yet when you mix the two in a portfolio, do you get red? Or gold?
Regardless, it’s hard to imagine two companies more red, white and blue. Both are based in the American heartland state of Illinois: Deere in Moline and Caterpillar in Peoria, just 90 miles southeast via Interstate 74. Both specialize in the kind of rugged machinery that harvests crops and propels construction projects.
[See: 7 Global Goats That Could Bring Market Mayhem.]
And the two trade on that apple-pie bastion of capitalism, the New York Stock Exchange, with share prices within a whisker of each other: DE at $83, CAT just pennies shy of $80. Yet to be sure, this isn’t a case of Tweedledum and TweedleDeere, if you will.
“On the surface these two companies look very similar,” says Justin G. Gardner, associate professor of agribusiness at Middle Tennessee State University. “They both produce heavy equipment, but their primary product focuses are quite different. Caterpillar is first and foremost a construction equipment company that dabbles in farm equipment. Deere is a farm equipment company that also markets lawn and construction equipment.”
Thus, the earnings and fortunes of each company hinge on different sets of factors. For Deere, the key to profits is to grab the bull by the ears — literally.
“It all boils down to corn,” Gardner says. “Corn is our primary field crop and most crop prices will follow the price of corn. That makes corn prices the best way to track the financial health of the farm sector.”
In other words, farm equipment sales correlate to corn and crop profits. “As I frequently tell my students, when the price of corn is up, farmers buy toys,” Gardner says. “If you’re buying stock in Deere you are basically taking a long-term, low-risk, long position in corn futures. That is a smart bet and now is a good time to buy and hold.”
Granted, Deere’s stock price took a beating late last summer — a reflection of collapsing corn prices, since the 16 percent drop over three days coincided with the 2015 harvest. But corn has many factors on its side that foreshadow a price jump after a two-year slump.
“If the dollar is weak, for example, this will spur exports and this is good for U.S. corn growers,” Gardner says. “A drought will drive up the price of corn. Again, good news for corn growers. Renewable fuel mandate? Good for corn growers.”
[See: 7 Stocks to Buy When a Recession Hits.]
Contrast that with Caterpillar, which ties its fate in large part to the construction and mining industries. It’s off about 25 percent over the last 24 months, but up 17 percent since the start of 2016.
Why the longer-term fall and shorter-term rise? It’s tough to say, especially since its machine retail sales figures fell sharply between March and May, while a first quarter earnings report for 2016 revealed revenues 25 percent lower that the same period last year.
But things haven’t turned out as bad as some market mavens expected, and that’s good in a bizarre Wall Street sort of way. Or the allure could be CAT’s attractive dividend yield, which is roughly 4 percent.
“Looking at the two companies’ performances, one could make a clear argument in support of preferring either stock over the other,” says Jeffrey Zucker, co-founder of Green Lion Partners in Grand Junction, Colorado. “Caterpillar offers a higher dividend than John Deere, while Deere offers stronger margins and its stock performance has been stronger.”
According to the Dividend Channel, CAT ranks No. 32 on the list of most shorted stocks on the Standard & Poor’s 500 index, while DE sits in the No. 13 slot. The “days to cover” period — that is, the time required to close out all short positions — is 7.93 days for CAT and 9.87 for DE, compared to an S&P 500 average of 3.66 days.
Yet Deere and Caterpillar do mirror each other in at least one other way: the analyst opinion side of things. Both currently run courses that are by and large straight up the middle.
With Deere, three call it a “strong buy” — as high as it gets — and three a “sell,” as low as it gets. And in the “hold” category? Eight more analyst firms. That’s not as many as the dozen that call Caterpillar a hold, though the symmetry is much the same: on either side of that fulcrum, one firm labels CAT a strong buy, and one a sell.
But at least one investment VIP also calls Deere a buy, and that’s Warren Buffett. The billionaire’s Berkshire Hathaway (BRK.A, BRK.B) bought 5.8 million shares in February to increase its stake in the company to 22.88 million shares — more than 7 percent of Deere. And the Oracle of Omaha, being based in the Midwest just as Deere is, must see something that only farmers and farming experts do.
[Read: How to Create Wealth Without Stocks.]
As Gardner says: “Corn prices will go back up at some point. They always do, it’s just a question of when. This tells me that Deere, or any agriculture sector stock, is bargain priced.”
More from U.S. News
11 Great Investing Tips for Women
The 10 Best Materials ETFs We Could Dig Up
Stock Market Showdown: John Deere vs. Caterpillar originally appeared on usnews.com
