Caterpillar to Test 200-Day After Double Downgrade

The Dow stock was downgraded to "sell" at UBS

Feb 26, 2019 at 9:22 AM
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Caterpillar Inc. (NYSE:CAT) stock is down 3.6% in electronic trading, after UBS double downgraded the blue chip to "sell" from "buy, and slashed its price target to $125 from $154 -- an 11.6% discount to last night's close at $141.41. The brokerage firm said slowing global construction sales will likely pressure CAT's revenue and margins, and spark an 8% year-over-year decline in the company's 2020 earnings per share (EPS).

This bear note is relatively rare for the Dow stock, with not one of the 17 covering analysts maintaining a "sell" rating at last night's close. More specifically, 10 carried "buy" or better recommendations on CAT, compared to seven "holds."

Options traders have been unusually bullish toward CAT in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 3.04 ranks in the 100th annual percentile, meaning calls have been bought to open over puts at an extreme pace.

Elsewhere on Wall Street, though, short sellers have been ramping up their bearish exposure to construction stock. Short interest surged 48% in the most recent reporting period to 11.47 million shares. As such, some of the recent call buying could be at the hands of shorts hedging against any upside risk.

Whatever the reason, it's an attractive time to buy premium on CAT options. The stock's Schaeffer's Volatility Index (SVI) of 25% ranks in the 15th annual percentile, indicating short-term options are pricing in relatively low volatility expectations at the moment.

Looking at the charts, CAT is up 21.8% from its late-December lows near $116, and closed yesterday at its highest point since mid-October on U.S.-China trade buzz. Today's downside could be contained near Caterpillar's 200-day moving average -- a recently toppled trendline that served as support late last week.


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