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The following article will take a look at a combination of fundamental indicators for Caterpillar (NYSE:CAT) and American Express (NYSE:AXP). In the article, we will look at how each company has performed from August options expiration to October options expiration to determine any seasonal patterns. In addition to that, we will look at key fundamental information to determine if the stock is trading at discounts or premiums currently. From there, we will use that information to craft positions for each company.

Daily Data: Caterpillar Inc.

Despite beating earnings estimates by 11.31% (67.11% YoY rise) on July 25, investors have been worried about Caterpillar's growth…or should I say China's growth. Caterpillar's stock price has been in the penalty box ever since it used the following words in its conference call, "Construction sales were up in North America…and Asia-Pacific was off 11%. And of that 11% decline in Asia-Pacific, more than all of that was China." Perhaps Caterpillar stock deserves to trade cautiously low until Chinese industrial production picks up again. However, let's recognize that Caterpillar's P/E ratio is currently 9.54. If we compare the current P/E to next year's expected growth rate of 9.46%, we can assume the stock price is at fair value. However, given that average expected EPS growth is 17.50% for the next 5 years, I see a lot of value in Caterpillar. Thus, I decided to look at the August to October option expiration date returns for the past 10 years.

Above you see that there is no bull/bear bias in the stock since 2002. One could make an argument that CAT has posted nice positive returns during this period for the past three years but that's not good enough for me to get bullish. I always worry about the worst return, in this case -44%. However, given that the Fed will continue to keep rates low coupled with a readiness to implement QE3, I'm going to ignore 2008 right now. If we ignore the negative return in 2008, then we see a completely different aspect of these returns. All of a sudden the returns seem much more bullish and I get an estimated max low of $78.07. Given the data above (excluding 2008), I suggest the following trade. Note, CAT is obviously not trending up, I suggest that only risk takers implement this trade.

Option Trade: CAT - Sell Oct'19 75/70 put spread (Bull Put Spread)

(Sell 75 Put/Buy 70 Put)

Size - 5% of Option Spread Portfolio Size = (1 spread)

Entry: Sell Limit: 0.50

Stop Loss: 1.20

Exit Price: 0.00

Max Return: 11.11%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Daily Data: American Express Company

American Express is looking great, technically. The stock is trading above all moving averages and looks like it's about to break out to new highs. Fundamentally, the stock has consistently beat earnings 11/12 times. The only thing I don't like is that the stock has a 1.30 PEG ratio as the current P/E of 13.69 is above both next year/next 5-year EPS growth rates. However, given that AXP does not have a wildly high PEG ratio and that it's technically strong, I still consider it worthy to look at the August to October option expiration date returns since 2002.

Just as with Caterpillar, we see a giant negative return in the August to October period of 2008. However, if we believe that type of scenario will not happen this year, then we can focus on the overall picture of the other returns. Excluding 2008, AXP seems to experience low volatility during this period. Low volatility coupled with a strong technical uptrend suggests to me that AXP may have a neutral to bullish chart until October expiration. Neutral to bullish price action merits a neutral to bullish trade (i.e. a bull put spread).

Based on the information above, I suggest the following trade. Note: If you were to ask me whether I would want to own our position in UNH or AXP, I'd probably choose AXP. Hence we're probably going to exit our trade in UNH and enter the suggested trade in AXP this week.

Option Trade: AXP - Sell Oct'19 52.50/50 put spread (Bull Put Spread)

(Sell 52.50 Put/Buy 50 Put)

Size - 5% of Option Spread Portfolio Size = (1 spread)

Entry: Sell Limit: 0.50

Stop Loss: 1.20

Exit Price: 0.00

Max Return: 11.11%

(Max Return Calculated on Return on Risk from my entry, not Return on Margin)

Charts and fundamental data come from Finviz.com and Tradingeconomics.com

News from: www.theflyonthewall.com


[1] http://www.theflyonthewall.com/permalinks/entry.php/BAC;C;RF;STIid1691965/BAC;C;RF;STI-Large-bank-Q-EPS-estimates-raised-at-JPMorgan

Disclosure: I do not own any investments in CAT or AXP. I own short calendar/vertical spreads on GLL (I'm short GLL). I'm short SCO, GLL, and ZSL. I'm long AAPL.

Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by Giorgio Ferrero, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Source: How To Trade American Express And Caterpillar Through October