Shares of Caterpillar (NYSE:CAT) certainly have struggled over the past few weeks. CAT stock is now down over 11% since closing at $157.49 on June 12. Much of the recent carnage can be attributed to the Chinese tariff turmoil along with the weakness in commodity prices.
But oil and agricultural prices have firmed over the past few days, and the tariff fears are beginning to ebb as well. I look for a washed out CAT to rebound over the coming month.
The recent sharp pullback has made Caterpillar much more attractive from a fundamental valuation perspective with a forward price-to-earnings ratio of just 14.29 for 2018 and even lower for 2019 and 2020. All of these forward P/E ratios are at a big discount to the overall market. CAT also sports an attractive dividend yield of 2.3% along with a very safe payout ratio of just 32%.
It is important to also remember that Caterpillar has trounced earnings over the past three quarters while the shares have literally gone nowhere. CAT stock closed at $138.24 on Oct. 24 and is currently at $139.53 even given the three massive earnings beats in the interim. This combination of much higher earnings with the same stock price definitely makes CAT a better value.
CAT stock is also looking attractive from a technical standpoint. Shares are now at the most oversold reading over the past year on a 14-day RSI basis.
The last time Caterpillar was close to this oversold proved to be a significant short-term low in the stock. CAT stock has been down seven straight days and is perched right at major support at the $139.50 level. A bounce here would certainly be warranted.
The drubbing over the past few weeks has lifted implied volatility (IV) in Caterpillar options. They are now trading at the 53rd percentile of IV, meaning option prices are comparatively expensive. So to position to be a buyer of CAT stock on further weakness, a bullish put credit spread makes probabilistic sense.
CAT Stock Trade Idea
Buy CAT July $130 puts and sell CAT July $135 puts for a $1 net credit.
Maximum gain on the trade is $1 per spread with maximum risk of $4 per spread. Return on risk is 25%. The short $135 strike price is structured well below the $139.50 support level and provides a 3.2% downside cushion to the $139.53 closing price of CAT stock.
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.
