Caterpillar (CAT) – Closing Long Position – up 70% vs. S&P up 43%

We made Caterpillar (CAT: $207/share) a Long Idea on May 27, 2020 and reiterated it on July 2, 2020. At the time of both reports, CAT received a Very Attractive rating. We felt the firm’s industry-leading profitability, strong balance sheet, and diversified revenue streams positioned the business well to rebound post COVID-19, while the stock was trading at a historic discount and provided quality risk/reward.

This report, along with all of our research[1], leverages our more reliable fundamental data[2] to get the truth about earnings, as shown in the Journal of Financial Economics paper, “Core Earnings: New Data and Evidence.”

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During the 1+ year holding period, CAT outperformed as a long position, rising 70% compared to a 43% gain for the S&P 500.

Our thesis largely played out as expected, as Caterpillar’s revenue and profits have begun to rebound in recent quarters, and its stock price followed suit. Now, despite its quality of earnings, the stock looks fully valued. The expectations for future cash flows baked into the current stock price imply Caterpillar’s margins will improve to levels higher than historical averages while revenue growth will outpace consensus estimates.

With limited upside potential, we are closing this long position.

Figure 1: CAT vs. S&P 500 – Price Return – Successful Long Idea

Sources: New Constructs, LLC and company filings

Note: Gain/Decline performance analysis excludes transaction costs and dividends.

This article originally published on July 19, 2021.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

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[1] Harvard Business School features our Robo-Analyst research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

[2] Three independent studies from respected institutions prove the superiority of our data, models, and ratings. Learn more here.

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