CAT Could Be a Purrrrrrfect 90-Day Play

Caterpillar Inc. ( ticker: CAT) manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. It operates through three lines of businesses: Machinery, Engines, and Financial Products.

After reaching a high of over 115 at the end of April, CAT has sold off sharply, dropping 27 points, or nearly 25%, to 88.40. In the same timeframe, the S&P 500 has dropped about 10%, making CAT a big relative under-performer. While earnings were a slight disappointment, the reaction since the report in late July has been extreme, especially since forward guidance was upped and margins continued to expand.

With expectations of $6.25-$6.75 per share for 2012, using the mid-point of 6.50 places CAT at a forward P/E of under 14, which is a trough valuation. Additionally, CAT is now yielding over 2%, not too far off the 10-year Treasury yield of 2.5%.

With a 9-day RSI (or "relative strength index") under 20, CAT is also extremely oversold on a technical basis. We look for CAT to bounce back to the 95 level by November. 

Tim Biggam

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