Last article I wrote on Caterpillar (CAT) was in early December when the stock was moving sideways in a price channel. At that time, I was of the opinion that it would not have any extreme bullish moves in the near future. Here's a summation of my observations:
"The probability of sales from "Sandy" boosting revenue in the short run is good, but I do not believe it is the catalyst for long term growth. I can see it propping up numbers temporarily. I am concerned about the whole mining industry in 2013 because there is still pressure to cut cap spending and this does not translate into revenue for Caterpillar."
It appears in the short run; the stock has increased and has done quite well for itself. I am still of the opinion that 2013 will be a so-so year for Caterpillar. My opinion rests around the lack of mining expansion I am expecting, and I am not alone. Bank of America Merrill Lynch reiterated its Neutral rating on Caterpillar and this is what they say:
"As the global leader, CAT is a global powerhouse in mining, construction, and power systems equipment. CAT is very well positioned for the long-term, but the slower earnings trajectory that we foresee in coming years due to fading momentum in mining equipment demand and a softer construction equipment outlook will likely limit the stock's multiple expansion potential, in our view."
Others see an opportunity in Caterpillar
There are a number of reasons for this. With the recent pleasant numbers coming out of the Chinese PMI in December, some are of the opinion that the fear of a Chinese slowdown is about over and the $157 billion dollar infrastructure plan will continue benefiting Caterpillar. U.S. construction is slowly but steadily on the rebound and since the building cycle is slow and steady, it should provide a gradual increase for Caterpillar.
Should we beware the Chinese rally?
China was the talk of the bearish world late last year as doomsayers spoke of economic collapse for the country. The market has fought its way into good graces again with a 20% climb since late November and if it continues, it is good news for everyone. Since Europe is a huge export factor for China, its gain must also mean Europe is on its way to healing. The stimulus is a factor in this swing upward, and some analysts believe the turnaround is something that will last. Even Caterpillar believed the Chinese economy would turn positive in 2013. If there should be any concern, it is the fact that this "recovery" is a government recovery and not private industry. Michelle Gibley from the Schwab Center for Financial Research in Denver, Colorado says:
"China's economy is rebounding and that's what is helping the market there. But it's been led by infrastructure spending. It's government led. The problem is that governments have to pay for this spending. The question is how far can the recovery go?"
I cannot answer this, but I do know that a healthy global economy is lead by a healthy Chinese economy, so we need the country to continue to do well.
The stock has made a nice move at year's end moving from a low of around '80' to just over '95.' This is an increase in value of 18.75% in just over 2 months. That's quite a move for the stock. As I observe the RSI indicator and the MACD, I am noticing that the stock is giving an overbought signal in the RSI and the MACD MA's are reaching a new high point. Usually when this occurs, it could be the beginning of a move back. One thing that signals it may not be ready to end is the movement in the Bollinger Band. The move off the upper band is in a bullish diagonal pattern and this means it will continue to move up. It is also touching a strong point of resistance. If it pushes through here on strength, I would expect this point to become support.
The Option Play
The stock is presently trading at 97.62 and I like the bullish movement of the stock. Buying into the momentum would be a good strategic move for a short-term income play.
- Buy the February 2013 call with a strike of "77.50' (priced at $2.34)
- Net Debit to Start: $2.34
- Maximum Profit: unlimited
- Maximum Risk: net debit
- Maximum Length of Trade: 4 weeks