The Sky King
Growing up in Queens, New York back in the day, when it came to sports, I pretty much stuck to the home teams. In those days, adolescents would gather around Shea Stadium on game days. None of us had any money, but that was okay, because the way the stadium was built left large open gaps that made finding spots where kids could watch most of a game for free not too difficult. From the the top of the trees behind where the bleachers were eventually built, a kid could watch about 70% of a baseball game, and from the extreme end of the subway platform above Roosevelt Avenue, about 60 yards of the football field were visible. Kids just needed to listen to the crowd, and carry a transistor radio in order to compensate for the blind spots.
This morning, Caterpillar (CAT) reported quarterly earnings, and I was immediately brought back to my youth. Back then, Hall of Famer Tom Seaver was the hero of every kid in Queens. The Mets though had another player later in the decade as the team slid into decline that also tugged at the imagination. Dave Kingman, the Sky King. Unreal power, much like Caterpillar. Caterpillar also much like Kingman, swung this morning and missed. Badly.
CAT reported EPS of $2.55 on revenue of $14.3 billion. Revenue was in line with consensus. The profit number missed by a country mile. From a surface view, sales across every business line seem to be growing nicely, just obviously not what was priced in. The firm guided full year EPS toward a range of $11.75 to $12.75. The problem with that is that the consensus of the analyst community had been up toward the very top of that range. So, is all lost for Caterpillar? I do not hold CAT in any of my portfolios, but there is a bull case.
Even though Dave Kingman often struck out, he also hit a lot of home runs, and because of that fact, enjoyed a long baseball career. This week U.S./China talks will take place in Washington involving high level leadership just below the chief executive level. Regardless of anything seen in the data today, the market, in particular for a name such as this... that is seen in a way as a proxy for how global growth will trade on those headlines. It does not matter that only 5% of CAT's revenue originates in China. You get a positive sounding communique on Thursday, this stock will recover. You get anything else, and today's selloff will seem like the play of children. Oh, the same goes for the nearly the entirety of the industrial, the material, the energy, and much of the tech sectors as well.
What To Do If You're Already Wearing The Shares
Well, at least if you have owned the shares since last Tuesday, then you are the owner of record for the next dividend payment of 86 cents a share due on February 20th. That's something. If this were me, and I took this punch in the gut, then I am looking to manipulate my net basis. There are really just two ways of doing this without raising the white flag. By the way, as always, if one is extended beyond one's tolerance for risk, or if one is not sure if they are indeed that far extended, then one needs to reduce the size of the position.
For the rest of the long and wrong crew, one might go about dollar cost averaging, a method of share accumulation that I tend to have no problem with if executed on plan, and not under pressure. Likely, I would reduce net basis through the sale of options. Covered calls are safer, but if a trader has in mind a level where they are okay with and understand the additional risk, then I have no problem with selling puts as well. I do it often. To increase potential premium realization, there will be a need to push expiration out at least three months toward the next reporting season.
Example: Minimal lots assuming long position of 100 shares.
Sell one April $135 call (Value: $3.78)
Sell one April $120 put (Value: $5.28)
Aggregate Credit: $9.06. The stock is down about $11 this morning while I write. The positive is that this strategy will recapture most of what has been lost today by greatly reducing the trader's net basis. I often turn profits on positions where I have sold the equity at a lower price than I paid for it through the use of this method. This strategy will increase risk at discounted levels, while limiting potential for profit. That said, if a trader is long Caterpillar, that trader should now be in risk management mode.