The month of October has not been kind to shares of Caterpillar (NYSE:CAT). After making a recent high near $160 to start the month, CAT stock has been been hammered down nearly 18% to close at the lowest levels of the past year. While some of the drop is warranted given the expectations for slowing growth, the selling has definitely become overdone. Look for Caterpillar stock to head higher over the coming months.
Caterpillar reports earnings before the opening tomorrow with expectations for $2.83 in earnings-per-share versus just $1.95 for the year ago quarter. The company has crushed earnings for the last four quarters, yet CAT stock has literally gone nowhere in that time frame, meaning multiples have come down sharply.
Caterpillar stock now sports a trailing twelve month price-to-earnings ratio of less than 14, by far the lowest level over the past year. This should help buffer any downside earnings miss while fueling any upside earnings surprise. A solid dividend yield of 2.62% and a $10 billion stock buyback program should attract value and income investors.
CAT stock is deeply oversold on a technical basis. The nine-day RSI is fast approaching the lowest levels of the year with a reading below 20. The previous times Caterpillar was this oversold marked a significant low in the stock. CAT has also completely closed the earnings-related gap from a year ago and is hovering right at major support at $132.50.
A break back above this area could once again provide the impetus for a sharp rally higher.
The Best Approach to CAT Stock Now
Caterpillar has major exposure to the Chinese markets via a number of key facilities. The company has been investing heavily in China to take advantage of the trillion dollar government sponsored Belt and Road initiative. Furthermore, Chinese revenues currently account for 6% of the overall company sales but compose the fastest growing segment, showing a 44% increase last quarter. Any expectation of a rebound in China should likely have a meaningfully positive effect for CAT stock.
Given the cheap valuation and deeply oversold technicals, probabilities favor taking a long position in Caterpillar stock in front of earnings. The magnitude of the upside pop on another earnings beat should far outpace any downside drop on an earnings miss.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
