Watch Out: Barbarians At The Gate For Caterpillar (CAT)

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Trade-Ideas LLC identified Caterpillar ( CAT) as a "barbarian at the gate" (strong stocks crossing above resistance with today's range greater than 200%) candidate. In addition to specific proprietary factors, Trade-Ideas identified Caterpillar as such a stock due to the following factors:

  • CAT has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $407.3 million.
  • CAT has traded 5.3 million shares today.
  • CAT traded in a range 215.9% of the normal price range with a price range of $2.29.
  • CAT traded above its daily resistance level (quality: 328 days, meaning that the stock is crossing a resistance level set by the last 328 calendar days. The resistance price is defined by the Price - $0.01 at the time of the signal).

Stocks matching the 'Barbarian at the Gate' criteria are worthwhile stocks to watch for a variety of factors including historical back testing and volatility. Trade-Ideas targets these opportunities because the stock is exhibiting an unusual behavior while displaying positive price action. In this case, the stock crossed an important inflection point; namely, 'resistance' while at the same time the range of the stock's movement in price is more than twice its normal size. This large range foreshadows a possible continuation as the stock moves higher.

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More details on CAT:

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The stock currently has a dividend yield of 2.7%. CAT has a PE ratio of 17.1. Currently there are 7 analysts that rate Caterpillar a buy, no analysts rate it a sell, and 12 rate it a hold.

The average volume for Caterpillar has been 5.1 million shares per day over the past 30 days. Caterpillar has a market cap of $57.2 billion and is part of the industrial goods sector and industrial industry. The stock has a beta of 1.78 and a short float of 3.7% with 5.01 days to cover. Shares are down 0.3% year-to-date as of the close of trading on Tuesday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates Caterpillar as a buy. The company's strengths can be seen in multiple areas, such as its good cash flow from operations and notable return on equity. We feel these strengths outweigh the fact that the company has had sub par growth in net income.

Highlights from the ratings report include:
  • Net operating cash flow has significantly increased by 140.47% to $3,018.00 million when compared to the same quarter last year. In addition, CATERPILLAR INC has also vastly surpassed the industry average cash flow growth rate of 35.11%.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 21.7%. Since the same quarter one year prior, revenues fell by 18.4%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Machinery industry and the overall market, CATERPILLAR INC's return on equity exceeds that of both the industry average and the S&P 500.
  • CATERPILLAR INC's earnings per share declined by 42.9% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, CATERPILLAR INC increased its bottom line by earning $8.49 versus $7.39 in the prior year. For the next year, the market is expecting a contraction of 35.2% in earnings ($5.50 versus $8.49).
  • The share price of CATERPILLAR INC has not done very well: it is down 5.01% and has underperformed the S&P 500, in part reflecting the company's sharply declining earnings per share when compared to the year-earlier quarter. Looking ahead, although the push and pull of the overall market trend could certainly make a critical difference, we do not see any strong reason stemming from the company's fundamentals that would cause a continuation of last year's decline. In fact, the stock is now selling for less than others in its industry in relation to its current earnings.

STOCKS TO BUY: TheStreet Quant Ratings has identified a handful of stocks that can potentially TRIPLE in the next 12 months. Learn more.

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