Guest Analyst: Tim Biggam, TradingBlock (August 5, 2011, 11:00am CDT)
|Symbol||Analyst Target Price||Target Date|
|CAT||$95.00||Nov. 18, 2011|
Caterpillar Inc. (ticker: CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It operates through three lines of businesses: Machinery, Engines, and Financial Products.
After reaching a high of over 115 at the end of April, CAT has sold off sharply, dropping 27 points, or nearly 25%, to 88.40. In the same timeframe, the S&P 500 has dropped about 10%, making CAT a big relative under-performer. While earnings were a slight disappointment, the reaction since the report in late July has been extreme, especially since forward guidance was upped and margins continued to expand.
With expectations of $6.25-$6.75 per share for 2012, using the mid-point of 6.50 places CAT at a forward P/E of under 14, which is a trough valuation. Additionally, CAT is now yielding over 2%, not too far off the 10-year Treasury yield of 2.5%.
With a 9-day RSI (or "relative strength index") under 20, CAT is also extremely oversold on a technical basis. We look for CAT to bounce back to the 95 level by November.
Play of the Day
Based on Caterpillar's (ticker: CAT) current market price of $86.76 and using a target price of $95.00, a target date of November 18, 2011 and $1,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.
Click on the strategy name below to access trade details using TradeBuilder on TradingBlock.com. Powered by TradingBlock's TradeBuilder.
|Strategy (click for details)||% Return at Target||Probability of breaking
even or better
|Sell Nov Put Spread||+91%||54%|
|Buy Nov Call Spread||+84%||48%|
|Buy Nov Iron Condor||+38%||55%|
* Subject to change due to changing market conditions.
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