Shares of Caterpillar (NYSE:CAT) have been struggling over the past several weeks. CAT stock has gone nowhere since the rally stalled in early November. This even with the overall market making new highs on a seemingly daily basis. While the melt up in stocks may continue, at some point a pullback is inevitable. When it does, look for CAT stock to lead that pullback lower.
Caterpillar missed earnings once again last quarter and lowered guidance. EPS came in at $2.66 per share, well shy of the analysts estimates of $2.88. Revenues also were a miss at $12.8 billion versus expectations of $13.3 billion. The full year outlook was lowered from between $10.90 and $11.40 per share from a previous $12.06 to $13.06 per share.
Yet CAT stock has rallied over 11% since that earnings release. Apparently lowered guidance and earnings misses are now a bullish sign for a stock.
What This Means for Caterpillar Stock
The combination of a higher stock price plus lowered earnings means that the P/E multiple has necessarily expanded. This makes valuations less attractive. CAT stock is back at the highest P/E ratio over the past year at over 14. The last time it was at such a rich multiple led to a sharp pullback in CAT stock.
CAT is looking a little tired from a technical take. Caterpillar stock is having difficulty breaking out past the major overhead resistance area at $148.50. 9-day RSI reached overbought levels but has now weakened. MACD continues to flounder while momentum has turned lower. CAT stock is trading at a big premium to the 100-day moving average which has led to pullbacks in the past.
In my previous analysis on Caterpillar stock from Oct. 7, I had a bullish outlook for CAT. This was based on attractive comparative valuations and improving technicals. This proved to be the case as Caterpillar stock has rallied over 20% since then. Now, however, my outlook is decidedly more bearish — because price does matter.
CAT carried just a 11.3 P/E at that time compared to over 14 today. The oversold technicals are now neutral to overbought. CAT stock was trading at a discount to the 100 day moving average but is now at a premium. All the tailwinds for the previous rally from a few months back have become serious headwinds. The upside looks limited from here for Caterpillar over the coming months.
Analysts seem to echo that somewhat bearish sentiment. The average 12 month price target is $141.40 or over 4% lower. Four analysts actually have a sell rating on CAT with a low price target of $100. Certainly not a bullish outlook for Caterpillar stock.
Stock traders should look to sell CAT stock on any further strength. An initial downside profit objective would be the $140 area where the latest leg of the rally began. The ultimate price objective would be a pullback to the 100-day moving average near $133. A break past the secondary resistance at $158 would be a viable stop out.
Option traders may want to look to take advantage of comparatively cheap implied volatility. The February / January $140 put calendar costs roughly $2.00 and positions nicely for a pullback towards the $140 area. Maximum risk on the trade is $200 per spread. Ideally CAT stock closes near $140 at January expiration on the 17th to achieve maximum gain.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in receiving finding out more about unusual option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.