Yahoo Finance After Making New Highs, Caterpillar Inc. (CAT) Stock Is Priced For Purrfection
Shares of Caterpillar Inc. (NYSE:CAT) are finally starting to show signs of slowing down a monster rally. CAT is now up 15% from the latest earnings report on July 25 and up 27.5% year to date, more than doubling the 13.4% gains so far this year in the Dow Jones Industrial Average. While the latest earnings report and subsequent rally were impressive, both the fundamentals and technicals are now pointing to a period of consolidation in CAT stock.
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CAT certainly delivered on earnings last quarter, beating on both the top and bottom line. Guidance was raised to $5 for the 2017. J.P. Morgan machinery analyst Ann Duignan called the latest earnings report “classic Caterpillar,” warning that the recent growth may not last due to the cyclical nature of business.
Certainly CAT stock is no longer cheap, trading at a rich 25 times earnings estimates.
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Although higher stock prices tend to obscure ongoing issues, it is important to remember that Caterpillar is still under IRS investigation for tax and accounting fraud. CAT is accused of using a Swiss shell company to shift revenues overseas to avoid paying higher U.S taxes.
For a company that is an avowed favorite of President Donald Trump, this certainly doesn’t fit in with the Make America Great Again mantra.
Caterpillar is at extremely overbought levels from a technical perspective, with a current 14-day RSI reading the highest of the past year and of well over the 70 level.
Shares of CAT are also trading at a big premium to the 50-day moving average. The price action from Friday was also bearish, with CAT trading to an all time high of $125.55 before reversing to close lower on the day at $124.71. Taken together, these technical indicators have been a reliable sign of short term tops in Caterpillar stock over the past year.
So with Caterpillar looking tired technically and stretched fundamentally, a bearish call credit spread play makes intuitive sense.
CAT Stock Trade Idea
Buy CAT Nov $135 calls and sell CAT Nov $130 calls for a 70 cents net credit.
Maximum gain is $70 per spread with maximum risk of $430 per spread. Return on risk is 16.3%. The short $130 strike price provides a 4% upside cushion to the $124.71 closing price of CAT stock.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at timbiggam@gmail.com.
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