Stock of the Day - January 14, 2009

Since its inception in 1925, Caterpillar (CAT) has been a staple of American construction. The machinery manufacturer also does business internationally.

CAT, like most other companies in the industrial goods and construction sectors, moves cyclically with the market. The rising and falling of CAT’s stock prices nearly matches the expansions and contractions of the Dow Jones curve. Over the past 5 years, however, CAT’s price increases have been much greater than its falls, and the stock peaked at nearly $86 dollars. The sell-off we saw in late 2008 left the stock at a low of $31.95, a price level not seen since 2004.

The stock has made a light rebound since hitting that low, and the latest trade was made at $39.35. The company did well in the first two quarters of 2008, generating more revenue than in the years before. But the last two quarters of 2008 were weak, with a quarterly earnings growth of -6.4%. This decline in growth was due to the recession, as not many companies and families were constructing new buildings and homes.  As a result, CAT’s services were not in high demand for the second half of 2008.

A huge factor that must be considered when analyzing CAT’s stock is Obama’s announcement of a stimulus package. He has most recently announced that his plan proposes to “rebuild crumbling roads, bridges, and schools.” He hopes to create 3 million jobs and the package is projected to cost upward of $750 billion, but some experts estimate that the package will cost as much as $1 trillion. It is safe to assume that this package will have a profound effect on the industrial machinery market, and Caterpillar’s sales will increase as a result.

For this reason, I believe that CAT is a company that you trade, not invest.  Once Obama enters into office and talks of the stimulus package begin to heat up, I think that the prices will continue to escalate until the bill for the package is officially announced. I would sell the stock a few weeks after the bill is passed. This is because after the bill passes the company will soon peak in sales and I would expect investors to peak in their interest of the company. Once the government demand for Caterpillar and the hype about the stimulus package has been inputted into the stock price, there will be very little demand left because of the continuing recession.

Obama’s stimulus package will have a large initial effect on the market and it would be foolish not to take advantage of the short-term gains. But remember: Once that catalyst hits, you have to get out.

 

-Matt Schwartz

College Trillionaire