Trimming a Caterpillar Position: A Money Manager's Process (CAT)

| About: Caterpillar Inc. (CAT)

Roger Nusbaum submits: I do what I can on this site to share my process for managing money. I don't dwell too much on naming names as I do not want this to be thought of as a stock touting site. Like most investment managers, I make good decisions and bad ones. Most individuals managing their own portfolios will also have mixed results with their decisions.

On May 23 I wrote a post about having sold half of my exposure (for clients) in an unnamed industrial stock. The stock in question was Caterpillar (NYSE:CAT). This is a name I have owned for clients since 2003. I own the stock because as an industrial stock the cap size is not huge, it is selling a lot equipment to anyplace in the world that is modernizing its infrastructure, the valuations are good and I have felt that it could outperform its sector.

In the time I have been involved with the name, none of the above attributes have changed much nor are they likely to change much in the near future. I executed the sale after hours on the 23rd at an average price of $73.70. Cat had an intraday high of $82.03 on May 10 and yesterday it closed at $66.89.

A big contributing factor to my decision to cut back was that at $73 and change the stock was up 28% for the year. Another concern was that I think the economic cycle is much closer to the end than the beginning and even if Caterpillar can do well in a recession, fundamentally, I would expect the industrial sector, price-wise, to languish before a recession (top down thinking).

So the next question might be why keep any, and there are two important reasons why. The first is that I could be wrong, Kudlow might have it right and the next recession might be nowhere in sight and a big industrial stock like this one might double in the next six months. Also I believe in maintaining a diversified portfolio. I would never want zero exposure to a sector of the market (although most clients own several other industrial names).

This general process stands up over time (for me anyway) and I think can be applied in the future.