Caterpillar is poised to break out

Posted Aug 12th 2009 4:20PM by Joseph Lazzaro
Filed under: Caterpillar (CAT), Stocks to Buy

I'm reiterating my Buy rating for Caterpillar (NYSE: CAT), first recommended on April 13, 2009 at a price of $33.02. If you purchased CAT at that time, you're up a solid 41%.

Back in April, I put CAT in the not-for-the-squeamish category, due to the uncertain timetable for the U.S./global recoveries: the upside was always there, but so was the potential for a 30% hair cut.

Now, however, stimulus packages in the world's major economic regions, and a terrible recession that (finally) appears to have cut building capacity about as much as it could, points to economic recoveries, so demand for construction and agriculture equipment should rebound. Translation: CAT is undervalued. The First Call FY2009/FY2010 EPS estimates for CAT are $1.43 to $1.79.

Look for CAT to reach the $55-60 range soon, so this could be your last chance to achieve an out-sized gain.

Stock Analysis: Caterpillar is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% position in CAT now; then buy another 25% in three months, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your CAT position before October 2009. Sell/Stop Loss if you were to buy shares in this company: $17.

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Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: agriculture equipment, AgricultureEquipment, caterpillar, construction, recovery stocks, RecoveryStocks