Citigroup: Buy Caterpillar Stock Before Earnings

Options traders have been bullish over the past two weeks

by Emma Duncan

Published on Apr 23, 2018 at 9:23 AM
Updated on Apr 23, 2018 at 9:29 AM

Shares of heavy machinery maker Caterpillar Inc. (NYSE:CAT) are 1.5% higher in pre-market trading, after the stock received an upgrade from Citigroup to "buy" from "neutral." The brokerage firm said it expects upbeat earnings and construction growth in China to help the Dow stock outperform in the near term. However, the analyst in coverage cautioned on trade war uncertainty, and lowered its CAT price target to $180 from $185 -- still a 17.5% premium to Friday's close at $153.25.

Looking closer at the charts, CAT recently bounced from its 160-day and 200-day moving averages -- a reliable "buy" signal in the past. The shares have since added nearly 12%, and are back above their 50-day moving average after trading below here in March.

The stock could continue this momentum, too, if past is precedent. Caterpillar is expected to report first-quarter earnings before the bell tomorrow. Looking into its earnings history, CAT has finished higher the day after the company reports in each of the past four quarters, including a nearly 8% jump this time last year. The stock's average post-earnings daily price move is 3.3%, looking back eight quarters, regardless of direction. This time around, the options market is pricing in a 6% next-day move either way -- almost twice the norm -- per Trade-Alert.

Options traders appear to be bracing for another post-earnings move higher. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows CAT with a 10-day call/put volume ratio of 1.62. This ratio ranks in the 88th annual percentile, suggesting calls have been purchased over puts at a faster-than-usual clip during the past two weeks.

Those who have bought premium on CAT stock have been consistently rewarded over the last 12 months. The stock's Schaeffer's Volatility Scorecard (SVS) of 85 (out of 100) indicates Caterpillar shares have easily exceeded options traders' volatility expectations in the past year.

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