Piper Jaffray initiated its coverage on Caterpillar (CAT). Increasingly efficient operations and a recovering U.S. construction market are positives - but these are offset by a shaky outlook in the lucrative "Resource Industries" (mining) segment. Persistent weakness in China is also a concern. Caterpillar is cheap on a quantitative basis- only 9 times trailing earnings but some think it might be even less.
S.R.T.Z. Investments wrote an article about Caterpillar recently and ended the article with this paragraph that readily sums up my outlook on the stock:
"However, since I expect more declines in close future on (mainly) weak macroeconomic outlooks and market volatility, I think the stock will get more unjustified punishment from Mr. Market. Therefore, I'd wait some more and try to be a buyer at $70-$75 per share."
I am very supportive of the idea that the stock has further to fall before it continues to move up. If I am attempting to judge whether or not Caterpillar is a good investment right now, I may look at one of its competitors. I we can take a look at Deere & Company (DE), it may give us a better perspective for "value investing." Unlike mining, agriculture appears to have gained the attention of many investors. This company may be a good value buy right now, better than Caterpillar if that is what one is looking for. Deere repurchased $1.2 billion in stock during the first three quarters of its fiscal year (ending in October), and still had authorization to buy back almost $3 billion in shares at the end of the quarter. So when an investor is looking for growth, I believe it is important to keep competitors side-by-side to gain perspective into an investment and it just does not appear that the time is right to get into Caterpillar. I believe it may be close, but the stock may still have a few more points down before it takes a higher move up.
(click to enlarge)
Technically Speaking
The stock looks like it has built a really strong foundation at about 82.80. This is very close to where it sits now. Three different times it has touched this level and moved back up. Now that it is here again the puzzling question is: "Will it move up or continue back down through support?" The RSI indicator is not telling us anything but moving along with the stock. The extreme moves in the stock can be seen in the indicator as it moves from top to bottom and now it is close to the bottom as it has before. The MACD is also showing the extreme movements with the stock. SO through my observations, I cannot tell if the stock will push up again like the pattern suggests, or if it will continue down through support.
The Options Play
The stock is presently trading at 82.82 and I think it has better downward momentum than upward. It recently broke through support so I am going to lean on the bearish side and this time around I am looking at a credit spread.
- Sell a November 2012 call with a strike of '92.50' (priced at $0.28)
- Buy a November 2012 call with a strike of '95.00' (priced at $0.16)
- Net Credit to Start: $0.12
- Maximum Profit: net credit
- Maximum Risk: $0.82
- Maximum Length of Trade: 6 weeks
Reasoning behind the Trade
- Slowing global economy does not favor Caterpillar in the short run.
- Recently broke through support level (bearish lean)
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
