Caterpillar: No longer a big bargain, but still attractive

Posted Oct 31st 2009 1:20PM by Joseph Lazzaro
Filed under: Caterpillar (CAT), Stocks to Buy

I'm reiterating my Buy rating for Caterpillar Inc. (NYSE: CAT), first recommended on April 13, 2009, at a price of $33.02. If you bought CAT in April, you're up about 68%.

The growth story remains the same regarding Caterpillar: after a global recession that substantially reduced demand, the U.S. and global recoveries will enable construction and agriculture equipment to continue to rebound. Caterpillar's recent increase in its FY2009 EPS guidance to $1.85-2.05 adds to the positive mix. The First Call FY2009/FY2010 EPS estimates for CAT are $2.00 to $2.67.

To be sure, with a P/E of about 26, Caterpillar is not cheap, and no longer the fire-sale stock that is was in the spring, but the risk/return is still tipped in favor of the Buy for moderate-risk investors. CAT also recently cleared psychologically-significant resistance at $50, and pull-back this week to about $55 offers a good entry point.

Finally, the sell/stop loss has been raised to $33.50, or to just above cost, from $17. Hence, this is a zero-risk trade for your April-bought shares.

Stock Analysis: Caterpillar Inc. 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 one month, 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 December 2009. Revised sell/stop loss if you bought shares in this company: $33.50.

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

Tags: CAT, Caterpillar