Caterpillar Inc. (NYSE:CAT) has fallen sharply after trading at an all time high of $170.89 on January 22. Certainly some of the sell-off was attributable to a valuation realignment following a massive rally. But now the selling looks to be exhausted. The combination of impressive earnings and lower stock price makes CAT stock a value at current levels.

The last two earnings reports were both huge upside beats for Caterpillar. In that same time frame, CAT stock gone nowhere, having returned to where it was after the first earnings beat on October 24.  This means that P/E multiples have fallen sharply with a 2018 forward P/E now under 16.  CAT is now a relative bargain,  trading at a nearly 33% discount to the S&P 500 multiple of roughly 24.

CAT earnings are due April 24 with expectations of $2.05 in earnings and $11.58 billion in revenues. Caterpillar will continue to be a big beneficiary of the recent lowered corporate tax structure. Analysts also expect increased stock buybacks in both 2018 and 2019. Both factors are an unmitigated positive for the stock. Now that multiples have dropped dramatically, any pre-earnings position squaring will likely be lessened.

CAT Stock Chart

CAT stock is definitely building a base at the $140 area. Shares have been trading sideways since the early February drubbing. MACD is starting to grind higher and the 200 day moving average at $136.15 should lend substantial downside support.

On January 3, I had a decidedly bearish tone with CAT stock trading at the $160 level. Now that shares have dropped 10% even with better than expected earnings, my bearish tone has become decidedly more neutral — because price and earnings do ultimately matter. I look for the $140 level in CAT to hold pre-earnings.

So to position for continuation of consolidation,  a short term bull put spread makes intuitive sense.

Trade Idea for CAT Stock

Buy CAT Apr $135 puts and sell CAT Apr $140 puts for a 60 cents net credit.

Maximum gain is $60 per spread with maximum risk of $440 per spread. Return on risk is 13.63%. Plus the $140 strike price is right at major support.

These are the traditional April options that expire on April 20th — before the earnings release on April 24th. This will help reduce any earnings based jump risk and also dampen any major volatility in front of earnings.

Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility/.