Run With Deere, Unhook Staples

NEW YORK ( TheStreet) -- Investors in Staples ( SPLS) and Deere ( DE) are reeling from painful earnings releases on Wednesday. For Deere, it meant margins are getting squeezed that the company attributed to higher startup costs outside North America.

Europe has not provided much positive news this earnings season. Both Deere and Staples pointed at European economic problems as reasons for disappointing investors. I can understand why CEOs use Europe as the whipping boy, but it's not the only market in the world and, in fact, doesn't explain the rest of the performances for either.

To Deere's credit, the company did beat on revenue, and it's hard to argue the bottom-line results were that bad. Deere made $1.98 per share in the fiscal 2012 third quarter, up an impressive 29 cents over the same period last year.

Deere reported $9.59 billion in sales, also impressive with a 15% rise from last year. The main catalyst for the gap down in price is the squeezing of margins and lower guidance for growth. Both reasons appear to overstate any issues by the green equipment giant.

In this current economy, companies that can guide with double-digit growth expectations deserve a second look. Actually, your portfolio deserves a second look at Deere.

Deere expects to grow 13%, and while investors may have priced in a higher trajectory, maybe it's time for a reality check by those liquidating shares.

Deere's forward dividend is $1.84 after the recent adjustment. With a price of $75 a share, which means Deere is paying a yield of about 2.4%. But that's not all folks, if you order today and buy at $75 you also get a forward price-to-earnings multiple under 10 at no added cost.

Ok, that sounds a bit over-the-top with the sales pitch, but the payout ratio (the amount of profits paid in dividends) is less than 25%. That means that more dividend increases in the future are as likely with Deere as most anyone else. Plus the ultra-low earnings multiple means you are paying nothing for the 13% growth rate.

If you want value investing, this is it. While Deere is discounted, emotion plays a big role in the day-to-day pricing of stocks. Deere is not immune to the emotions that control trading. Gap-downs usually take more than one day to play out.

Deere opened up near the high of the day on Wednesday, and that normally is followed by at least one more day lower. Don't worry about missing out, and I suggest waiting a day or two before buying if you want to gain exposure.

Staples, on the other hand, doesn't appear nearly as appealing to me as Deere. It appears the market agrees based on how far the office supply company has fallen today. Currently, Staples is down about 15% to trade near $11.50 a share.

Many say the last move is the biggest move in a trend, but I don't believe it will be the case for Staples. I picture a dead-cat bounce by the end of the week followed by further softening in the share price within a couple of weeks.

If I owned Staples, I would look to exit and get out while the odds are in my favor. As I wrote about in my earnings preview with Staples , the large short interest combined with the major moving averages trending lower is not a favorable sign.

For those wanting to gain exposure to Staples I would suggest waiting about a week and look to buy at a better price. Chances are you will get an opportunity to buy in the low $10 range or even single digits.

Using options is always a great way to mitigate risk as well. Staples needs to fall about another dollar, but the $10 September puts become attractive near 35 cents within the next 10 days.

Staples pays a lofty 3.3% dividend that doesn't appear to be a yield trap -- at least not a trap with the spring set to cause pain. Keep in mind that chasing a yield of 3% and losing 10% in valuation is a losing deal no matter which way you slice it.

Is it really Amazon ( AMZN) that's eating Staples lunch? I don't think so, even though many are pointing at the large online retailer. The online world is bigger than Amazon, and even though Amazon may play a part it doesn't take much to figure out if business growth is slow, office supply houses will be, also.

Amazon is trading near the 52-week high and performing better than the overall market. I wouldn't buy Amazon here either. Amazon's price multiple requires an oxygen tank to breath, it's so high. The market is more or less pricing in Amazon taking over the world.

Short of world domination, Amazon is not a good bet. Sure it may go higher (I predict odds, not the future), but I don't own Amazon for the same reason I don't play the lottery -- the odds are not good.

Plow lightly into Deere if you're interested, and avoid Staples and Amazon.

At the time of publication the author did not hold a position in any stock mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.