Let's play it out. The day is April 22, 2016, the day that Caterpillar (CAT) reports. The stock is at $74, where it stands today, yielding 4%. The company is supposed to earn $0.97. There's one buy recommendation, 14 neutrals and four sells.
Do you think it goes up or down?
Now, fundamentally it is hard to believe this can be a good quarter. We have had nothing but cutback after cutback from major customers in the iron, steel, coal, construction, oil, gas, gold, copper and mineral companies. In fact, much of the reason why there has been a rally in all of these groups is that there have been monster capital expenditure slashings that have really bitten into exactly what Caterpillar sells.
Plus, we know that China is still downshifting and if the U.S. picks up, the Fed is going to raise rates and that should slap us back. Europe is struggling with negative interest rates. South America seems more like it could suffer from insurrection than recession.
So, if anything, numbers have to come down. Maybe come down big.
But what happens to the stock? If you look at this broad-based commodity rally we have had, even if it is based on short-covering, which they always are, you have to wonder to yourself: should there really be only one buy on Caterpillar? One?
Four sells? The best machinery company in the world? Does that make sense to you?
More important, tell me how many of these analysts feel like dopes right now, as they watched this stock go from $56 to $74, and up 10% for the year. Many of them probably thought that Caterpillar would cut its dividend. But it didn't need to, because it wasn't like CAT didn't see this coming. It's been cutting back for years.
Yep, this stock is saying that the last quarter was the last really bad quarter in the cycle, and that from now on CAT has cut back to where it can still make a lot of money, especially if the yen stays strong and Europe comes back.
So here's my suggestion. You can see that we are due for a selloff. The futures are down. The market's looking heavy. The stock of Caterpillar is extremely overbought. But I think every analyst who covers this stock is looking at that ratio of buys to holds to sells and is saying "oh lordy, walk this puppy back a little and I am jumping on the bandwagon, because the great commodity bear market, the one that drove iron to the $40 a ton ratio and the one that took copper to obscene levels, and the one that made almost all oil drilling in North America a loss, is over. And I am going to plant the flag as the guy who turned positive as soon as I can."
So, remember, that is how it works. When you get a bottom that sees iron ore jump 19% in a day or aluminum move up 10% since the year began, or copper clearly done going down -- regardless of the Chinese numbers -- an analyst can't afford to stay negative, because the next time CAT visits this level after the selloff the analyst can't say "damn I missed it again."
He has to be able to say, "I reiterate my buy recommendation."
And that's why a noxious stock like the one CAT has been may be the best place to be as the pullback to $70 begins.