The Big Yellow Leader

Written by GSCR Staff   
Tuesday, 13 May 2014 08:44

In yesterday’s Goldman Guide we opined on industrial stocks and how their cyclical nature is usually an indication of an inflection point to the upside in a market correction.  The question is, has this already happened?

 

There is one Dow Jones component that may offer insight into this potential phenomenon.  Caterpillar, Inc. (NYSE – CAT - $106.20), the MNC heavy equipment and engine manufacturer, has been on a tear up nearly 11% over the past three months and nearly 17% this year.  At a quick glance, the technical Daily Moving Average looks very bullish for the next 50 days for CAT also.  Is the ride over or still worth jumping on?

 

As far as the valuation and growth are concerned CAT, the wave still looks smooth.  The forward 12-month P/E of 14 versus the trailing 12-month P/E is one great sign.  Additionally, the 5-year PEG ratio of 1.31 still makes CAT an attractive proposition from a growth/price perspective.  The gross margin of 26% and operating margin of 11% are in line and well above the industry averages of 26% and 6% respectively. 

 

Last week Argus raised its price level to $120 for CAT, which we think is about right.  Options are an alternative to a straight buy here and there are some deals on some contracts at that level starting in July.  Coincidentally, we believe late summer should be about the time the market starts to get out of this corrective phase, and CAT will have led the way.

 

Have a great day!

 

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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