A Golden Opportunity With a Silver Lining

NEW YORK (TheStreet) -- If the headline of my article read, "Caterpillar Announces Gold-Plating Option for all Its New Machinery," the public would wonder why Caterpillar (CAT) would do such a thing.

The world's largest maker of construction equipment is, according to Reuters, doing something even more lucrative. It has begun exporting Chinese-made machinery to the Middle East and Africa, part of a plan to offset a dip in China's economic growth.

That may be more like striking gold for Caterpillar than using gold to make its construction equipment look shinier. Caterpillar looks shiny enough with its 67% (year-over-year) second-quarter earnings growth and its stock selling at only eight times forward earnings.

To add a silver lining, Caterpillar's five-year expected PEG ratio is an unbelievably cheap 0.52. The Price-to-Sales ratio is also below 1 (0.86). Price-to-sales is derived by dividing a stock's current price by its revenue per share for the trailing 12 months.

CAT shares are selling for less than its revenue per share, yet its quarterly revenue growth as of the end of June was up a pleasant 22% and its Return on Equity (trailing 12 months) is a plus 40%. If that's not enough, it pays a $2.08-per-share annual dividend.

If we were so fortunate to catch one more down day like last Thursday and buy CAT shares at $82.10, that would bring the yield to 2.53%. There's still a good amount of fear and uncertainty looming, so we may experience a market downdraft before the "all's clear" signal is sounded.

As the chart below tells us, Caterpillar's share price follows earnings and revenue growth.

CAT Earnings Per Share Growth Chart CAT Earnings Per Share Growth data by YCharts

Equipment companies like Caterpillar are well off their highs because the perception persists there's a worldwide economic slowdown and that the mining sector, which includes precious metals, is dead in the water.

Yet, the Federal Reserve Bank trotted out its latest dog-and-pony show to the media spotlight as recently as Tuesday to vanquish this sense of hopelessness and clue investors in.

Eric Rosengren, the president of the Federal Reserve Bank of Boston, showed up on both CNBC and the Wall Street Journal to turn up the noise about what the Fed needs to do to jump-start the comatose economy.

Rosengren called for "an aggressive, open-ended bond buying program that the central bank would continue until economic growth picks up and unemployment starts falling again," The Journal reported.

You know what that means? Here comes QE3 aimed at driving interest rates lower, drive up the price of stocks, and push down the value of the dollar. It means re-inflating the economy with the kind of economic stimulus that borders on the extreme.

As I've written in recent articles, if the FOMC surprises to the upside it won't just be companies like Caterpillar that will rally big time!

The better-quality large gold producers that pay a decent dividend such as Barrick Gold ( ABX) and Newmont Mining ( NEM) should react effervescently.

Once again a chart can help us notice that these two monster money-makers of the precious mining industry as well as the entire sector represented by the Market Vectors Gold Miners ETF ( GDX) have been and still are in the dumpster.

ABX Chart ABX data by YCharts

The chart also shows the share prices of these potent companies are just beginning to move higher. Even the darling of the silver industry, Silver Wheaton ( SLW) as the next chart illustrates, is just beginning to rise, along with the most popular ETFs that represent the price of gold and silver.

SLW Chart SLW data by YCharts

As history has taught us over and over again, when the people with the purse strings (think FOMC) crank up their money-making, monetary-fertilization machines, the price of all sorts of metals goes higher and the equipment makers who help the metals producers also get a nice boost skyward.

As Boston Fed President Rosengren has boldly suggested, this time it might even be a bigger, better, more "aggressive" program of monetary infusions and financial stimuli.

By the way, in the past 10 years, whenever the price of gold and silver have been fairly flat for around a year, it's been followed by an impressive rally in both precious metals. My gold teeth are vibrating with anticipation that we're getting close to another one of those buoyant reactions. Place your bets soon.

At the time of publication the author was long ABX, GDX, NEM and SLW.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Most large cap stocks were once small and mid-cap stocks. Bryan Ashenberg is here to help you find the cream of the crop amongst the market chaos.

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