Here Are 2 Top Ways to Play Caterpillar Stock

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Caterpillar (NYSE:CAT) is a great American company, but the current economic conditions do not favor its prosperity. CAT stock depends on global growth. Currently, countries are struggling to stay afloat. The worldwide quarantine in March halted all business at the drop of a hat, so all expansion plans died almost overnight. The problem is that restarting growth is going to be a long slog.

A Caterpillar backhoe

Source: aapsky / Shutterstock.com

The order to reopen businesses is easy, but what won’t be easy is recapturing the growth momentum that was in motion before the crisis. Moreover, there will be restrictions going forward as panic has set in and threatens the way we did business before the novel coronavirus.

With all this uncertainty in mind, infrastructure stocks will struggle until after the November election.

CAT Stock Is in Good Hands

The Caterpillar team has extensive crisis management experience. But this global quarantine was unique — and almost all stocks crashed. From the January high to the March low, CAT stock lost more than 40% of its value. The bulls recovered most of it, but the easy work is done.

This sounds bearish, but there is light at the end of the tunnel. There are technical opportunities looming just above and below current levels.

CAT stock has been setting higher lows and hitting a roof near $141 since the March bottom. This makes for a great standoff, and so far, the bears have won battles at that line. The onus is on the bulls to take it out so they can trigger a spike. The reward for them if they do that is a $20 to $40 overshoot from there. It won’t be easy and there is a lot of resistance in the way of that outcome.

Fundamentally, the setting is not ideal for Caterpillar’s business. The macroeconomic conditions are in shambles and hundreds of millions of people are out of work worldwide, so the demand for equipment is definitely depressed. Governments are in the process of reopening their countries but there have been hiccups, especially in the United States. The recovery ramp is not going to be steep. Investors must be humble with their upside enthusiasm.

Luckily, CAT stock is not expensive with a 14 times price-earnings ratio. Moreover, there is very little froth in the stock price relative to its full-year sales. This means it doesn’t have a lot of fat to shed like say Zoom Video Communications (NASDAQ:ZM) for example.

The Stuck-in-the-Muck Trade Opportunities

Caterpillar (CAT) Stock Showing Downside Support

Source: Charts by TradingView

I last wrote about CAT stock almost two years ago, and at the time, it was trading at similar levels. This is emblematic of how limited its upside potential is. Since it is not overvalued I would be more enticed to sell risk against support then chase potential rallies.

Nevertheless, there are two opportunities from here. The first is to buy the stock on the breakout above $141 per share. This would be a momentum trade with a clear upside target. Or the second — and my favorite — is to sell premium against what others fear. I find it best to sell puts to generate income out of thin air against proven support zones.

Using the options, I can sell the October $110 put and collect almost $2 for it. I don’t even need a rally to win. In fact, CAT stock can fall almost 20% and this trade will still deliver its maximum gains. But if it falls below my put then I have to own the shares at $110 with a break-even level of $108. Without a new shoe to drop, owning Caterpillar at that price is not likely to be a mistake in the long run.

At $108 per share it would have closed all the chart gaps this year and would be close enough to the Covid-19 low for support.

The basic idea of today’s setup is to trade Caterpillar stock by either chasing the momentum above $141 per share, or betting on the downside support from the quarantine. Otherwise, investors would be relying on a lot of “hopium” in order to profit.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/here-are-2-top-ways-to-play-caterpillar-stock/.

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