While the lack of performance is shameful, perhaps the real shame comes from exercising a buy-and-hold approach with a stock that has been so well suited for a covered call strategy, as it has traded in a range and has been repeatedly cited and chided for doing so. Whenever you hear a stock criticized for being unable to break out of its trading range it's time to think of creating your own annuity, rather than looking for an alternative investment.
That range has created the opportunity to create your own annuity by serially purchasing shares when within that range and selling near the money or in-the-money calls and, in the process, creating immediate income streams. After all, why use out-of-the-money calls in an attempt to optimize share gain when the real gain is from premiums? Collecting premiums and collecting dividends with occasional, albeit small gains or losses on shares over and over again has been an annuity in disguise. The income not only flows on a regular basis, but its accumulation can be significant and even make a celebrated short seller salivate.
In an 18-month period I have owned CAT shares on 15 different occasions, with an average holding period of 39 days, sometimes holding different priced lots concurrently. In that time the average purchase price per share was $84.74, as compared to Monday's $87.38 close.
Adding dividends the 18-month return would be 5.2% for the buy-and-hold investor as compared to 52.7% for the aggressive covered option investor. During that same period of time the Dow Jones climbed 22.3%. Clearly there is no assurance that lofty kind of return will continue, but the longer Caterpillar shares are able to wallow the more likely there will be opportunity to add to that return.
Ultimately, every single argument being made against Caterpillar may be warranted. However, Caterpillar's price behavior provides a good argument for remaining agnostic regarding the issues that others find so compelling as to lead to price declines.
For the short-term time frames typically used in the covered call strategy employed with Caterpillar, larger issues such as overly aggressive economic forecasting, projected negative free cash flow and accounting practices that may have provided non-recurring benefits have little meaning.
At its current price, shares are getting near the upper limit of where I am comfortable entering a new position, but on any weakness, particularly if in advance of shares going ex-dividend, I think Caterpillar is worthy of consideration as a covered call position.
At the time of publication the author had a position in CAT.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.