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This morning, we’re recommending a bullish trade on Caterpillar, Inc. (NYSE:CAT), the manufacturer of construction and mining equipment.
Like most industrials, CAT has been the victim of the “trade war,” which has put pressure on the stock as it consolidated between $120-$135 per share over the last few months.
There are short-term signs that the stock is starting to break out of that consolidation range, and we think this is a good opportunity for us to take a position.
CAT’s Fundamental Outlook is Improving
From a fundamental perspective, CAT has been increasing free cash flow and earnings per share since the contraction in the energy sector in 2016. We think the stock is undervalued, especially considering the improving prospects for a U.S.-China trade deal.
This is also the beginning of another round of production cuts by OPEC and OPEC+ members that is designed to send the price of oil higher again. They were eventually successful at a similar campaign in 2016-2017, which was good for U.S. domestic producers and heavy equipment manufacturers as rising prices increased demand for equipment.
Inverted “Head-and-Shoulders” Pattern
From a technical perspective, CAT is just breaking through an inverted “head-and-shoulders” pattern that has bullish implications. The last time CAT completed a technical pattern like this, it rallied through most of September 2018.
Daily Chart of Caterpillar, Inc. (CAT) — Chart Source: TradingView
Now, with the fundamental picture looking good, CAT could break out of the $120-$135 range it has been in since November. We think a position in CAT makes sense, but doing it through a hedged position using short-puts allows us to control our risk to a greater degree.
We can sell puts on CAT and collect premium as CAT rises. If it finds support at the upper end of its consolidation range, our puts will expire worthless, and we will keep all the premium from selling the options.
To find out which CAT puts we’re selling — and to get access to our full portfolio of income-generating trades — consider signing up for risk-free trial subscription to Strategic Trader today.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
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