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Cramer: Fake out! How Deere fooled everyone

Cramer: Fake out! How Deere fooled everyone

It is a rare occasion when it occurs, but sometimes Jim Cramer is downright stunned by a company. That happened less than two weeks ago when Deere reported results and sent shock waves through the stock market.

"Even more surprising than Deere's strength was the fact that nobody seemed to see it coming. Nearly everyone assumed the end markets were so bad that there was nothing the company could do to compensate," the "Mad Money " host said.

Until it reported, agricultural equipment maker Deere had subpar performance, basically flat for 2016. That narrative abruptly changed on Aug. 19 when it reported a quarter that sent the stock soaring 13 percent in a single session.

"It gave us the mother of all head-fakes," Cramer said.

The next time Wall Street seems to give up on Deere, just remember how management head-faked the analysts.
Jim Cramer
Harvesting winter wheat in Kirkland, Illinois.
Daniel Acker | Bloomberg | Getty Images

Cramer traced the beginning of the head fake all the way back to Deere's previous quarter, when it painted a glum picture of its business. When it reported in May, it lowered full-year net income guidance substantially, and management said equipment sales would sink 9 percent for 2016, and the next quarter would be worse, down 12 percent.

Geographically, Deere forecasted a 15 to 20 percent decline for its North American agriculture business, followed by declines of 5 percent in Europe and 15 to 20 percent in South America.

The awful quarter in May caused Wall Street to basically give up on Deere, Cramer said. The stock plunged 5 percent the day after the results came out, and analysts slashed estimates.

But then something strange happened.

After the initial 5 percent decline, the stock stopped going down. Deere's share price started heading higher, Goldman Sachs even upgraded it in June.

"In retrospect, that was the first sign of Deere's incipient comeback," Cramer said.

Goldman said Deere is a cyclical company, and its stock could near a bottom when its results are at their worst. Goldman highlighted that demand for high horsepower equipment hit a 30-year low and suggested a bottom could have come.

The rally from Goldman didn't last, though, and the stock sank again. In July, management announced 120 layoffs. Wall Street became very skeptical of Deere's ability to offset declining demand with cost cuts.

Given all of these negatives, Deere's strong quarter in August surprised Cramer. Not only did it report strong headline numbers, but also its management commentary was more positive than the last time it reported. Its leadership also suggested that more cost cuts could happen if its prospects did not improve.

Even better, management raised its full-year earnings forecast to signify confidence that it can protect the company's margins by keeping costs down. Meaning, Deere did not increase its guidance because end markets got better. It raised the numbers because its execution was so good, Cramer said.

The agricultural business may still be in rough shape, but Deere demonstrated to Wall Street that it can still do more with less, which is why the stock roared.

"I don't like to chase a stock after it has had a big run, but the next time Wall Street seems to give up on Deere, just remember how management head-faked the analysts," Cramer said.

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