The second half of 2014 was not kind to Caterpillar Inc. (NYSE:CAT) shareholders. In fact, CAT stock has plunged more than 20% during this period, leaving the shares trading in 52-week low territory.
CAT stock has a chance to change direction next week, however, after Caterpillar earnings hit the Street ahead of the open on Jan. 27.
Drilling into the numbers, analysts are expecting Caterpillar earnings of $1.55 per share on revenue of $14.2 billion for the quarter. Estimates have come down sharply during the past several weeks with the brokerage community citing plunging oil prices as a major concern for Caterpillar’s revenue.
What’s more, some analysts have even lower expectations, with EarningsWhisper.com reporting a whisper number of $1.51 per share.
In light of Caterpillar’s perceived earnings woes, many in the brokerage community have jumped aboard the bearish bandwagon. For instance, according to data from Thomson/First Call, 18 of the 26 analysts following CAT stock rate it “hold” or worse, compared to just eight “buy” ratings.
Furthermore, the 12-month consensus price target of $96 represents a meager 10% premium to CAT’s close at $86.82 on Thursday.
Options traders, meanwhile, are quite bullish on the short-term prospects for CAT stock. Currently, put open interest in the January/February series of options (including weeklys) totals 84,698 contracts, compared to call open interest of 111,920 contracts. The result is a call-weighted put/call open interest ratio of 0.75, which ranks below roughly 95% of all such readings taken in the past year.
Click to Enlarge Overall, implied volatility on weekly Jan 30 series options appears to be pricing in a post-earnings move of about 3.5%. This places the upper bound of the expected move near $90.03, while the lower bound rests near $83.97.
As a result, a post-earnings rally could put CAT stock on the path to recovery, with the shares having a shot of taking out short-term resistance at 90, while a decline would put the stock in danger of hitting yet another 52-week low — potentially confirming a longer-term downtrend for the shares.
Given this data, especially the oversold technical conditions and price support near a 52-week low, I’m inclined to bet on a short-term bounce from CAT stock.
Basically, with most of the plunging oil data already priced into the shares, all the company has to do is match lowered earnings expectations and remain firm in its fiscal 2015 outlook, and the stock should see positive price action post-earnings.
2 Trades for CAT Stock
Call Spread: For those traders looking to capitalize on a potential post-earnings bounce, a Feb $86.50/$90 bull call spread could fit the bill. This trade was offered at $1.04, or $104 per pair of contracts, at the close of trading on Thursday. Breakeven lies at $87.54, while a maximum profit of $2.46, or $246 per pair of contracts, is possible if CAT stock closes at or above $90 when Feb. options expire.
It should also be noted that it is possible to double your initial investment on this trade (at $88.58) even if CAT stock does not close at or above $90, so make sure to have a limit order set to lock in profits.
Put Sell: Alternately, if you’re not sold on a contrarian play on CAT stock, you could look into a bull put sell position. After the close last night, the Jan 30, $80 put was bid at 25 cents, or $25 per contract.
The upside to this put sell strategy is that you keep the premium as long as CAT stock closes above $80 when weekly Jan 30 options expire at the end of next week. The downside is that should CAT trade below $80 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $80 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
