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Extreme sell-offs can offer value opportunities in stocks like $CAT

|Includes: Caterpillar Inc. (CAT)

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 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%
Buy Stock +9% 57%

* Subject to change due to changing market conditions.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services.