This CAT Has 9 Lives….For Now

Hi Dave,

I am looking Caterpillar (CAT) and I would like your opinion on it.

Fundamentally CAT has not been doing too well lately and has had a diminishing market cap as well as a diminishing EPS ratio. There is also been some poor mergers and acquisitions in the past that have weighted down on the balance sheets.

Yet having said this CAT has followed the rise up in the DJIA regardless of many of its fundamentals, based primarily on the idea that Trump will spend more on infrastructure. The way also that CAT does business as a supplier is as such that the flow down effect of these orders will not be for many months if not years from now. As the equipment will slowly follow after financing and design of many of these projects. So their cash flow will not likely increase for a while even if this spending does get under away. On top of all this I am also aware that the Fed at some point must raise interest rates which in theory should put pressure on the dollar which makes CAT manufacturing less competitive to Japanese competitors.

This is the fundamental outlook as I see it but technically I feel and I would like to hear what you think as well about where it’s sitting technically. The weekly chart looks like the upward channel has finally broken on it and its ready to drop at some point. I can see a convergence on the MACD looking like it’s about to form into a red downwards move and the RSI seems to show it is getting quite close to oversold. It is also trading very far away from its 200 day moving average which makes me think its probably a little over shot.

Thanks and keep up the good work,

Sam B – Copenhagen Denmark

Hi Sam,

A great and very detailed question.

Sadly, as you are likely aware, critical thinking in this market seems to offer little value. Prices simply go up. ALL news is seen as good news and non-GAAP earnings are used for price projections (insane).

However, the biggest contributing factor I see as causing the price action you note relative to the fundamentals is simply the indexation of the markets.

I wrote about this in a recent blog post and it offers much insight as to why stocks that are large components of indices simply get dragged along for the ride. Valuations and general business operations be damned. There is no longer price discovery.

That is my take at least. I learned many years ago that there will be periods where prices and reality become disconnected. Rather than over-thinking it I sit and wait patiently for some catalyst that pushes prices in the direction that makes sense based on good old fashioned critical thinking.

Hope that helps,

Dave

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