Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

CAT Stock Bouncing after JPM Upgrade How High and How Long Can This CAT Jump?

Companies / Corporate News Jan 23, 2018 - 11:01 AM GMT

By: EconMatters

Companies

Caterpillar’s (CAT) stock price touched an all-time high of $172.99 on Jan 16 and has drifted lower since.  This price action took place after upgrade from JP Morgan a week ago.  The stock jumped 2% in the day JPM report came out on Jan. 8. 

Shares of Caterpillar have already climbed almost 80% over the past 12 months while the S&P 500 advanced about 20% during the same period.  In fact, Caterpillar was one of the top five performing stocks of the Dow Jones Industrial Average (DJIA) in 2017.  Caterpillar, along with Boeing, have helped boost DJIA to record highs over the past several months. 


From some of the upgrade analysis you can tell how the investing community has lost almost all common sense perspective in this central banks fueled market rally.  For example, instead of top or bottom line growth potential, UBS bumped up CAT’s target price by 16% a week before JPM noting the tax bill could provide around $750 million for share buybacks.  When has share buyback even become an element in stock recommendation? Does that suggest if Caterpillar decides to invest the extra cash for business, UBS would give it a downgrade?     

“10-year Upcycle”

JPM at least came up with a stronger argument.  According to JPM, the primary driver of CAT shares “in the coming years” is the Republican tax reform bill.  Since then, several other investment houses came out with higher price targets for Caterpillar also citing GOP tax bill as the catalyst.      

JPM argues that the global economy as a whole has entered into a "10-year upcycle" in commodities. Production of iron, coal, copper, etc. is rising, and bringing prices along with it.  In JPM’s estimate, we're currently entering only year two of this upcycle.  That means Caterpillar has nine more years to benefit from the “10-year upcycle”.  

Party like It’s 2005

According to JPM, the construction industry could absorb as much as 233,000 annual unit sales of heavy mining equipment, matching peak sales at the top of the last upcycle in 2005. 

I’m not sure why investors should get all excited over the possibility of the entire construction industry equipment unit sales back to the 2005 levels?  Not to mention it is uncertain how much of the 233,000- unit-sales pie CAT would have?    

What’s Really Going on at CAT?

Now let’s take a look at what’s happening at Caterpillar to actually warrant this exuberance. 
2016 was a five-year low point for Caterpillar.  Its sales were falling for four straight years.  The company suffered a 36% drop in earnings in fiscal 2016 citing weak end-user demand in most of the industries it serves, including construction, oil and gas, mining and rail. 



Caterpillar managed to rebound in 2017.  In 3Q 2017, trailing-12-month sales increased 9% from their 2016 trough, and free cash flow grew 63%.  It is a moderate improvement considering the easy comp's to the 2016 low’s, but enough to impress investors to think Caterpillar has delivered a successful turnaround. 

By the way, I forgot to mention federal agents raided Caterpillar headquarters last March as part of the government investigation into the company’s alleged tax evasion by shifting corporate profits to a subsidiary in Switzerland.     

PE at 112, Really

Caterpillar’s Price Earnings (PE) Ratio has gone from 8.81 in 2006 to currently 114, compared to around 26 for the average of S&P 500.  Normally, the PE of industrial manufacturers such as Caterpillar should have a PE in single digits to the mid-20's range.   
  
Remember the core business of Caterpillar is making industrial equipment such as tractors, which is a mature sector.  And CAT is not a sexy tech stock with tremendous growth potential justifying a high-flying PE multiple.  Even Facebook (FB) only has a PE of 35 which is only 30% of what Caterpillar commands.      

More Like 10-year Tightening Cycle

Furthermore, remember we are actually in the beginning of central banks’ tightening cycle.  The US Fed helicopter is ahead of the monetary easing curve after the 2008 financial crisis, and again is ahead of the coming global tightening cycle.  Expect other central banks to eventually follow suit (it is safe to say within the next 10 years).   A business cycle typically lasts about 8-10 years.  The current business cycle began from the 2008 financial crash/monetary easing and has already pushed into uncharted territory.   I’m not sure how JPM could realistically model the “10-year upcycle” projection given the current lofty valuation on almost all asset classes and the increasingly high risk of war and recession. 

Technical and Cash Trading

How could a scandal-ridden tractor-making company become such a darling for investors?  Well, that’s just one indication that markets, along with investors, are not behaving normally and rationally. 

Zero Hedge reported how central banks like Swiss National Bank (SNB) made $55 Billion last year by purchasing foreign stocks and bonds.  This is equivalent to massive hedge funds backed by various governments manipulating the markets for its own agenda.  It is like an addictive drug high that everybody is on, but eventually the high will come to a very nasty crash that investors refuse to acknowledge.    

In this irrationally crazy market where a name change incorporating the word “blochchain” could rescue a penny stock from being delisted on Nasdaq, company fundamental analysis and macro event trading have become all but useless traps.  The suitable trading style that I believe could survive in this current environment is technical and momentum cash only trades based on solid research.       

Who will be left holding the bag?  Everybody, after a rude awakening by the sudden burst of this unprecedented bubble that would make 1929 a cake walk. 

Disclosure: At the time of this writing, the author and EconMatters do not have position in the aforementioned stocks.  Views and opinions are author's own.

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2018 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

EconMatters Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in