Building A Highly Profitable 2012 Portfolio With Caterpillar Or Deere

Includes: CAT, DE
by: Brian Nichols

One of my primary goals for 2012 was to review my portfolio and determine whether or not I could find better investments of value within the market. Every year I strive to make changes and learn from both my success and failures in an attempt to become a better investor.

And as I began my search, for the best value in the market, I found that there were many stocks that fell during the last six months of 2011 without fundamental cause. As a result I will be spending the next few weeks identifying the most undervalued stocks and highlighting these stocks as investments that could return high profits within an investor's portfolio.

The first changes to a portfolio that I think people should consider is purchasing shares in either Caterpillar (NYSE:CAT) or Deere & Company (NYSE:DE). Both companies are strikingly similar and are trading remarkably cheap compared to the fundamental progress and growth that each has experienced during 2011. Both CAT and DE closed out 2011 with a record performance and have given very encouraging guidance for 2012, yet both stocks are trading roughly $20 from their high.

Deere & Company is now trading near even, over the last year, despite earnings growth of more than 50% and revenue growth greater than 25% year-over-year. DE had traded with a gain of 180% from April of 2009 until April of 2011 but has since lost 17% of its value as a result of profit-taking and questions surrounding global growth. The stock is now trading at just 10x forward earnings and I believe is presenting great value. The company has done a great job at changing its identity to become a more well-rounded supplier to global growth. A large reason for its fundamental growth has been its forestry segment and its ability to capitalize on record farm cash receipts during 2011. The company's also expanded, with success, its global construction segment and has reported a near 50% gain in global net sales year-over-year. Deere now continues to build its presence with new plants in emerging markets that are being used as a catalyst for future growth.

Caterpillar reported record earnings in 2011 with revenue growth of 31% and net income growth of more than 50% year-over-year; yet its stock is trading near even during the same period. These two companies are very similar, in nearly every category, including the way in which the stocks trades; because CAT gained 228% during the same period in which DE gained 180%, only to lose 15% of its value since April. CAT now trades with a forward P/E of just 10.59 which is very cheap considering its fundamental growth. The company's growth is very similar to DE, as it relies on emerging markets as well, more specifically China. Caterpillar has transitioned over the last couple of years to become a global leader of mining equipment, which is what's driving the company's growth in China. The company's presence in emerging markets is significant and has room for additional growth which makes this stock a great investment with large upside.

The upside potential for these two companies is very similar and I believe that both would make an equally great investment. In fact, you could probably flip a coin and choose a stock then return very large gains for many years to come in either of these two companies. Because with such aggressive growth there is simply no reason for such low valuations, these stocks could easily trade with valuations of 30x earnings.

However, global fear and contradicting economic data has resulted in investors ignoring the companies' fundamental gains. I suggest taking advantage and purchasing one of these two fast growing companies, potentially as the largest holding in your portfolio, because sooner or later the stock price always reflects the fundamental progress, and once it occurs the gains will be massive.

Disclosure: I am long CAT.