Take Deere (NYSE:DE), for example. A superior company long known for its wide range of high-quality agricultural equipment and leading U.S. market share, Deere has, nevertheless, not been immune to weaker farm economics. The U.S. has been challenged. Brazil has been horrible. What Deere hoped to accomplish in Eastern Europe changed when Putin’s troops marched into Crimea. Success in the low horsepower Indian market has been slow coming. Deere’s sales worldwide have declined almost 30% from their 2013 peak while earnings per share have plunged almost 50%. A chart of its stock price and earnings per share suggests something entirely different however. Its stock has hit a new, all-time high while earnings are back at 2010 levels. Where’s the margin of safety in the purchase of shares now trading at 21.8x trailing twelve month earnings?7 Deere’s mid-cycle earnings should be higher, which would make the normalized valuation not quite as dear but we miss when such companies would trade as if the bad times would last forever. We aren’t picking on Deere. There’s lots of stuff that crosses our desks that hasn’t made much sense.
For a spell, the stock prices of some companies will defy logic but that won’t last forever. Eventually, fundamentals should prevail. In the interim, stock prices can trade anywhere. We hope to populate the Fund with quality companies whose current earnings fail to appropriately reflect longer-term prospects. Sadly, we’re finding a lot of Deeres out there, which explains that for as long as we can remember, we went an entire quarter (Q3 2016) without initiating a new position.
From Steven Romick (Trades, Portfolio)'s FPA Crescent Fund fourth quarter 2016 shareholder letter.
