Schaeffer's Trading Floor Blog

Weekly Contrarian: Is Caterpillar Inc. (CAT) a Long-Term Bullish Play?

Should you ignore CAT's short-term hurdles?

by 5/2/2013 11:50 AM
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When it comes to Caterpillar Inc. (NYSE:CAT), "strong long-term fundamentals trump current weakness," according to a recent Forbes article. Instead of focusing on an anticipated sales decrease this year, traders should broaden their horizons and look at the bigger picture. "As long as the world continues to become more industrialized, there will be plenty of demand for CAT products," considering the company leads the pack when it comes to equipment needed for infrastructure.

In addition, the author waxes optimistic on Caterpillar's management, which cut spending and reduced staff in the face of a global slowdown. This suggests "the company will be well positioned to adapt to a faster growth environment when one emerges," the author opines. Against this backdrop, CAT -- unlike many of its peers -- "is priced for gloom and doom" that the columnist doesn't see coming to fruition.

Contrarian Perspective

From a sentiment perspective, most analysts are in the same bullish camp as the Forbes author, with 11 out of 20 offering up "buy" or better endorsements, and not a single "sell" rating in sight. Plus, the average 12-month price target on the shares sits at $97.80 -- representing expected upside of 17.5% from CAT's current price of $83.82, and in territory not charted in almost three months.

On the other hand, option traders have been upping their bearish exposure. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the equity's 10-day put/call volume ratio of 0.97 ranks in the 81st percentile of its annual range. In other words, option buyers have picked up long puts over calls at a faster-than-usual pace during the past couple of weeks.

Technically speaking, CAT has made some progress since tagging a year-to-date low of $79.49 on April 22, in spite of the company's quarterly earnings miss and lowered guidance. Nevertheless, the stock remains 6.3% lower for 2013, compared to the Dow's year-to-date gain of roughly 13%. What's more, Caterpillar remains well south of its 10-month and 20-month moving averages, which have rejected all but one of CAT's monthly advances over the past year, and could limit any upside momentum.

As contrarians, we like to find fundamentally sound, uptrending stocks surrounded by skepticism, which often points to ample sideline cash to fuel further gains. In the case of CAT, though, there's not much pessimism plaguing the shares, which are still facing some technical hurdles.

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