Song Sung Blue Exit For Arrow Electronics, Long AGCO

About: AGCO Corporation (AGCO), Includes: ARW
by: Dark Horse Traders' Hedge

Song sung blue
Everybody knows one

Song sung blue
Every garden grows one

Me and you are subject to the blues now and then
But when you take the blues and make a song

You sing them out again
Sing 'em out again

Song sung blue

Weeping like a willow
Song sung blue
Sleeping on my pillow…

"Song Sung Blue" -- Neil Diamond

When should I sell a stock? This is a very difficult question to answer. Like Neil says, you can always take an announcement "sing it with a cry in your voice" and have a "song sung blue." In the case of Arrow Electronics' (NYSE:ARW) earnings announcement today "you simply got no choice."

Arrow Electronics, Inc. (ARW), was originally recommended for long exposure on November 4, 2010 at $30.55, and that recommendation was reiterated on February 4, 2011. I am of the opinion that it is time to close the position in ARW with a 39.54% profit "and before you know it start to feeling good." The key phrase that turns this earnings announcement blue is the guidance, which has me "weeping like a willow." The mean estimate from analysts for the first quarter 2012 is $1.07, and the company guided to a range of $1.01 to $1.13 after beating the fourth quarter estimate with $1.38 vs. $1.30. Further, analysts have revised the 5-year growth rate down to 7.4%, and at today's closing price of $42.63, ARW costs investors a forward P/E of 8.88. I prefer to have the ratio of growth to projected P/E much more in our favor, so my recommendation is to close ARW at the open Thursday.

So what stock to replace ARW with? AGCO Corporation (AGCO) has all the makings of a stock ripe for long exposure. AGCO is the third largest farm equipment maker in the world and has reported better-than-expected earnings results in the last four quarters. Analysts are expecting the company to report $1.33 on February 7, 2012, and it is trading at a forward P/E of 10.35. Granted, this forward P/E is higher than ARW's, but we are getting a 1-year expected earnings growth rate of 87.9% and a 5-year expected earnings growth rate of 18.6%. This provides us with the ratio that allows us to "take the blues and make a song, and sing them out again." AGCO is the #9 ranked stock in the Sabrient Baker's Dozen 2012, which have collectively gained over 15% in the first month of trading.


  • Sell ARW at the market, Thursday February 2, 2012
  • Buy AGCO at the market, Thursday February 2, 2012

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.