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Slip of the CAT Got Your Forked Tongue? (CAT)

Posted on March 3, 2021

We’re trucking today on the back of Dow component and global earth-moving champions Caterpillar Inc. (NYSE:CAT), a company that may have nine lives and always lands on its feet, but is sure enough destined for a tumble in the near term.

CAT stock is up better than 25% in just a month, but that has very little to do with the numbers.

Instead, investors seem to be looking forward to an anticipated, post-Batflu economic rebound, in which a great many benefits would certainly accrue to the company.

It’s a rebound, however, that we hate to admit we just don’t see.

Consider the following –

  • The stock’s P/E is 40.6,
  • It’s dividend yield is 1.87% (somewhat redeeming, yes),
  • It trades with a P/B of 7.67 (!),
  • Debt to Equity is a knee-slapping 2.42,
  • EPS this last year is a huge negative 49%,
  • Sales for the past five years are negative 30%
  • Q/Q sales are negative 50%, and
  • Q/Q EPS are negative 35%.

Yet things are looking up?  Stock up 250% in a year?

Come on, gang.

On hopes for the future…?

This thing’s priced for perfection in a Shangri-la la-la land.

Give yer head a shake!

Look at the chart –

Technically, we have –

  1. An overbought RSI signal as of last week (in green) – not good – the first in 3 years (the last of which presaged a grinding 27 month, 47% decline),
  2. MACD now buckling after setting a 36 year high (!) early last week,
  3. A break ABOVE a half year trend channel (in blue), commonly associated with irrational, blow-off buying spasms (also known in the business as a massive coronal hemorrhagic rupture), and
  4. A gap to be filled down to 164 – just below a simple Fibonacci retracement line at 173 (both in purple).

In short, fellow felinephiles, our beloved tabby’s about to stumble.

And we’re playing it like this –

A Jew and His Gold recommends you consider selling the May 21st 220/230 CALL spread for $3.30 (10.55/7.25) and buying the May 21st 220/190 PUT spread for $11.30 (15.70/4.40).  Total debit on the trade is $8.00.

Rationale: the essence of the trade is its risk/reward profile.

At stake is $18.00 – your maximum potential loss (difference between CALL strikes plus initial debit).

The maximum gain on the trade is $22.00.

Up front, your outlay is $8.00.

Breakeven on the trade is $212.00, just 1.7% below the current price of $215.82.

Full profits will be realized on a decline from here of 12%.

In other words, it looks good.

But for those who like the downside proposition, but don’t want to have so much at risk, there are other options.

The first is to drop the short CALL spread from the equation, pay $11.30 for the trade and max out your winnings at $18.70.

Breakeven for that trade would arrive at $208.70, and your maximum loss would be $11.30.

OR

Set the PUT spread deeper out-of-the-money, say, between 200 and 170, pay just $5.23 (7.10/1.87), and reap a maximum gain of $24.77.

Breakeven would come at $194.77.

Max loss would be $5.23.

And you can tailor it purr-fectly to your needs, tiger.

Many happy returns,

Matt McAbby

 

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