NEW DIRECTIONAL PUT PLAYS
Caterpillar Inc. - CAT - close: 72.16 change: +0.30
Stop Loss: 76.10
Target(s): To Be Determined
Current Option Gain/Loss: Unopened
Average Daily Volume = 5.8 million
Entry on September -- at $---.--
Listed on September 21, 2015
Time Frame: Exit PRIOR to earnings in late October
New Positions: Yes, see below
The recent relative weakness in CAT has awarded the stock a spot in our bearish plays section.
The bear market in shares of CAT continues. Most of the big industrial names are down about -10% year to date. CAT is down -21% in 2015 and off about -35% from its 2014 highs. The company has seen business hurt by a multitude of factors.
If you're not familiar with CAT, a component of the Dow Jones Industrial Average, they are in the industrial goods sector. According to the company,
"For 90 years, Caterpillar Inc. has been making sustainable progress possible and driving positive change on every continent. Customers turn to Caterpillar to help them develop infrastructure, energy and natural resource assets. With 2014 sales and revenues of $55.184 billion, Caterpillar is the world's leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The company principally operates through its three product segments - Construction Industries, Resource Industries and Energy & Transportation - and also provides financing and related services through its Financial Products segment."
The earnings outlook has been somewhat volatile for CAT. On January 27, 2015, the stock collapsed to new 52-week lows after the company missed earnings estimates and guided lower for 2015. Three months later on April 23rd the company beat estimates on both the top and bottom line and management raised their 2015 guidance. Jump ahead three more months and on July 23rd CAT reported earnings that were in-line with expectations but revenues fell -13% to $12.3 billion. This was below analysts' revenue estimates. CAT's management lowered their 2015 guidance below Wall Street expectations. Naturally the stock plunged on this bearish outlook.
The company has been hurt by the crash in commodity prices. Low prices for coal, iron ore, and oil discourage production and thus the need for more equipment manufacturers like CAT and rival Joy Global. A few weeks ago CAT reported that worldwide sales were down -11% in July. That was actually an improvement from the -14% drop in June. Asia was hardest hit thanks to weakness in China. Joy Global just lowered their 2015 outlook a few days ago as they look ahead through the rest of 2015. CAT also expect a tough second half.
This morning, September 21st, CAT updated their worldwide sales numbers for August. Global sales fell -11% again. This followed a -11% drop in July. The Asia-Pacific region worsened from -25% to -29%. Latin America improved from -37% to -33%. North America was still at -5%. CAT also noted that oil and gas-related equipment sales were down -20%, and transportation was down -38%. These are pretty ugly numbers.
CAT is a global business. Currency translations are taking a big bite out of sales. Weakness in the euro, the Japanese yen, and the Brazilian real are all adding pressure. When the U.S. Federal Reserve eventually raises rates that should boost the dollar and only make the currency issue worse.
CAT's management has been trying to support their stock price with an accelerated stock buyback program of $1.5 billion. It doesn't seem to be working. Investors are selling every rally and CAT is in a clear down trend of lower highs and lower lows.
The most recent oversold bounce from short-term support at $72.00 failed near resistance at $76.00. Now CAT is about to breakdown under $72.00. Friday's intraday low was $71.61. Tonight we are suggesting a trigger to buy puts at $71.40.
Trigger @ $71.40
- Suggested Positions -
Buy the NOV $70 PUT (CAT151120P70) current ask $2.55
option price is a current quote and not a suggested entry price.
Entry disclaimer: To avoid an unfavorable entry point, we will not launch a new play if the stock gaps open more than $1.00 past our suggested entry point.
Option Format: symbol-year-month-day-call-strike