Caterpillar Inc. – This short position could work

On Friday May 6th at the 21st annual Sohn Conference in New York which saw hedge funds coming together for a charity for pediatric cancer, David Einhorn, founder of Greenlight Capital noted that he was short on Caterpillar Inc. (NYSE: CAT). He said that Caterpillar Inc’s business was at the bottom. Asking the question whether Caterpillar Inc. was at or near the trough, Einhorn said that he thinks it is much close mid-cycle and that it could bottom in 2018. Most importantly, he said that he expect Caterpillar Inc. to trade at half of its current price. On May 6th, market close, Caterpillar Inc. close at $73.36. More details here.

Justifying his call, Einhorn said that Caterpillar’s business, which is primarily in resources, construction, energy and transport; sectors that are currently weak could affect the company’s business. Coal and Iron ore, he said were the two big drivers for the company and consumption in both have fallen. At the same time, Einhorn notes that construction spending has fallen as well with construction owners, preferring to rent rather than own equipment.

2016 Q1 earnings snapshot

$ in billions except profit per share First Quarter
  2015 2016
Sales & Revenue $12.702 $9.461
Profit per share $2.03 $0.46
Profit per share * $2.07 $0.67

*Excluding recurring costs

Full details of the quarterly earnings found here.

Caterpillar Inc. – Key fundamentals

Caterpillar Inc’s EPA for 2016 is currently at 21.04, less than the industry standard of 27.70. For 2016, the mean consensus estimate for Caterpillar Inc is 3.46. Analysts give a ‘Hold‘ recommendation for Caterpillar’s shares while over the next five years, analysts expect to see earnings growth at an annual rate of -10.74%, while expecting to see a 24.40% decrease in earnings over last year.

Hedge funds decreased their holdings in Caterpillar by over 603.3k shares in the last quarter having a negative sentiment on the stock.

Hedge Funds Holdings in Caterpillar QoQ change (Q1 – 2016)
Hedge Funds Holdings in Caterpillar QoQ change (Q1 – 2016)

Caterpillar Inc – Technical Analysis

The weekly chart for Caterpillar Inc. shows price breaking out from the descending wedge pattern, formed between 17th November 2014 highs of $107.12 and the subsequent lows of $56.36 formed on 18th January 2016. The breakout saw price action retesting the broken support for resistance near the $80 handle and eventually resulted in a doji reversal pattern right near this newly tested resistance. The downside bias is also validated by the hidden bearish divergence on the chart. Given the technical scenario and the fundamentals which support a lower share price, we expect a move to the downside.

Catrpillar Inc (NYSE:CAT, 73.36) - Weekly Chart
Catrpillar Inc (NYSE:CAT, 73.36) – Weekly Chart

We expect a modest retracement higher, to test the level of $76.0 which marks a small retracement. To the downside, we anticipate a test to $65, which was a minor support level that was broken and could be tested for resistance.

Taking two short positions at $76 is ideal with the first target for $65 and the second target left open for a possible test to previous lows near $57.0. The short bias will be invalidated if price closes above $80 on a weekly session with a bullish pattern.

Caterpillar Inc – Where to trade?

Deltastock offers CAT trading instrument with a minimum margin requirement of 5% with the option to short the share CFD. However, note that short positions incur a negative rollover swap of -2.50% of the position. Click here to trade. Open a new Deltastock account here.

Avatrade offers CAT trading instrument with a 10% margin requirement and a 0.06 cent spread. Short positions come with a negative rollover swap of -2.50%. Open a new Avatrade account here.