Recently announced buybacks and dividend hikes might be tempting, but don’t dig a hole going long Caterpillar (NYSE:CAT). More than ever and following a weak earnings report, CAT stock is a dog with fleas worthy of shorting.
Blame it on what you will. From rising manufacturing costs, a soft global economy or the U.S. China trade war, there’s some solid choices for what’s ailing CAT stock. More to the point, on Wednesday, the Dow Jones constituent and machinery giant did disappoint investors with its second-quarter results, which sent shares tumbling lower by nearly 4.5%.
Headlining for the bears, tepid profit growth of less than 1% missed Street forecasts calling for 5% growth as earnings of $2.83 per share came in well short of forecasts of $3.12. Revenues also came up light. Sales climbed by 3% to $14.43 billion compared to consensus estimates of $14.52 billion on growth of 4%.
The good news, if any, is Caterpillar reaffirmed its 2019 profit guidance of $12.06 – $13.06 per share. The range compares favorably to the Street’s mid-point of $12.22. However, one canary in the coalmine could be management now expects earnings to be at the lower end of the range.
The other canary warning investors to not be complacent and dismiss the report as old information already priced in, is the CAT stock chart. Now more than ever it’s time to position as a bear for big-time profits down the road.
CAT Stock Weekly Chart
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A weak year for CAT stock now has the back half of 2019 looking even stronger for bearish shorts. Prior to Wednesday’s pressure, the weekly chart shows shares have already carved out a series of lower highs since setting an all-time-high in early 2018.
More recently, two lower highs formed in 2019 also failed to overcome trendline resistance, which previously acted as uptrend support. Now, and following yesterday’s decline, CAT stock has confirmed the latter weekly doji high when shares traded beneath the pattern’s low.
With shares of Caterpillar less than 1% below the signal price of $133.02 and a bearishly positioned stochastics confirming the pattern weakness, CAT is offering bears a nice shorting opportunity with reduced risk and potential outsized rewards.
The CAT Stock Trade
The recommended strategy in CAT stock is to short shares today. If all goes and shares do continue to crater in 2019, I’d look to take partial and much larger profits on a test of last year’s corrective low near $110.
For containing risk I’d suggest a stop-loss placed 7.5% above-the-market. This minimizes exposure, but also exits only if bulls can muscle shares above $141.80. That’s 1.6% above last week’s pivot high and sufficient wiggle room to warrant closing the position without overstaying a deteriorating price chart for bears.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in Caterpillar stock, its derivatives or any other securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional options-based strategies, related musings or to ask a question, you can find and follow Chris on Twitter @Options_CAT and StockTwits.
