Five-Day Forecast: Is Deere's Run Done?

Business inventories have grown by more than $100 billion in each of the last three months. This has led the inventory-to-sales ratio to tick back up to 1.28 as of March, up 3 basis points after bottoming last November at an all-time low of 1.25. As long as the figure stays below 1.35, there shouldn't be cause for alarm. The figure peaked at 1.45 in 2001, and we had to wait until it fell below 1.35 in 2003 before we saw a return to vigorous economic activity.

Time to Cash In on Deere?

In the midst of this agriculture boom, it's heresy to suggest that it may be time to sell your winners. Shares of Deere (DE - commentary - Cramer's Take)have made a steady five-year March from $22 to a recent $85. And the ag equipment maker is likely to deliver another stellar earnings report on Wednesday, May 14.

Analysts believe that Deere's quarterly EPS jumped more than 20% from a year ago to $1.75. And get ready for a very bullish tone from management as demand for Deere's equipment is likely to be very strong all year. EPS estimates for the fiscal year that ends next October are expected to show a 30% jump to $5.20. And analysts expect EPS to march past the $6 mark by fiscal 2009.

To my mind, that could represent the peak of the current cycle, and shares don't typically trade for 15 times the cyclical peak. Typically, peak cycle multiples are in the high single digits, implying 30%-plus downside from current levels.

It takes nerve to be bearish on ag stocks when food shortages are making the headlines. But the macro winds are shifting direction. For starters, much of the Corn Belt boom has been fueled by ethanol demand. But Congress is waking up to fact that food and fuel should not compete: Sen. John McCain and 23 other senators asked the Environmental Protection Agency to ease ethanol production mandates. If that happens, the economic underpinnings of corn pricing and demand will fall, and that will affect farmers' spending plans.

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David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.