Results seem impressive on the surface, but investors didn't like what they saw. Is this a new buying opportunity for long-term shareholders, or is the best behind this giant industrial stock? I think it's important to start with a long-term view of Caterpillar's business. Below, you can see that Caterpillar's operating history is choppy, to say the least.
Revenue ebbs and flows with demand from construction, mining, and energy markets. When raw material prices are high, as they are now, and the economy is growing, the company does well. But demand can also fall off in recessions and weaker commodity environments. What investors should focus on is the long-term trends, which show revenue being fairly stagnant, so this isn't exactly a growth stock.
The company can have spikes in demand, as it did a decade ago with the Chinese commodity boom, or as it is now with the rush of activity coming out of the pandemic, but the company isn't growing long-term. You can see in the chart below that Caterpillar's stock is up almost exactly in line with its price-to-sales-multiple expansion.
CAT data by YCharts. When you add it up, Caterpillar's stock performance over the last decade was largely driven by buybacks and multiple expansion, not growth. That could be a red flag for me in today's market. Paying up for growth stocks is one thing, but paying a premium for companies that aren't growing and that are dependent on commodities can be extremely risky.
Caterpillar is what's known as a cyclical stock, and you can see that its business continues to operate in cycles. According to Bloomberg's commodity spot index, raw material prices are at a year high and near their all-time peak. Historically, that has led to a downturn in prices and ultimately equipment purchases.
We don't know if the cycle is peaking now or if it will be next year or the year after, but historical trends suggest that mining and energy markets are likely to hit the peak of their respective cycles in the next few years. A return of 8. Caterpillar Inc. CAT delivered a For much of its history, the operating efficiency of the company left much to be desired, but its underlying competitive position was rarely in doubt.
A series of actions over the past decade e. In our view, the company remains among the highest quality industrials in the market, but its underlying business is cyclical, which can translate to large swings in both performance and investor sentiment over short time periods. Our ability to focus on the long-term, sustainable earnings power of a business rather than getting distracted by near-term fluctuations is our most significant edge when investing in cyclical businesses.
Based on our calculations, Caterpillar Inc. CAT was in 62 hedge fund portfolios at the end of the first half of , compared to 53 funds in the previous quarter. We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between and Interestingly the margin of underperformance of these stocks has been increasing in recent years.
We have been tracking and sharing the list of these stocks since February in our quarterly newsletter. At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero.
We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers.
We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage.
Disclosure: None. This article is originally published at Insider Monkey. It is one of the most well known construction manufacturer. If you'd like to buy its stocks you need to find a broker that gives you access to the NYSE because that's the main exchange it's traded on hang tight, we'll get into this in a bit.
All of this doesn't mean that Caterpillar is a good company or a bad one. As part of this example you might want to get reminded of what you are considering investing in though. Okay so for your own reasons you have decided you'd like to buy Caterpillar. That's a good start. Let's see what lies ahead of you before you can officially state that you are a shareholder of Caterpillar! The process is rather similar for any company shares and again, we only take Caterpillar as an example.
One of the characteristics of an online broker is the exchanges they have access to. Not all brokers allow you to buy shares of Caterpillar, simply because they don't have access to the NYSE. Needless to say, you need a broker that gives you access to this exchange. The next important thing with a broker is that it should fit you as well. Not all brokers allow every citizen to open an account with them; some brokers are super expensive if you just want to buy a couple of Caterpillar shares every once in a while, some brokers can be absolutely free.
You can actually get great recommendations on choosing the right broker using our questionnaire:. Find my broker. When recommending a broker, we take into account different factors, like the broker's fees, trading platform, accessible markets to trade, and how easy it is to open an account. Safety is also highly important, but since we recommend only safe brokers, you do not have to worry about it.
After finding your online broker, you need to open an account. This is much like a regular bank account and opening one is usually a fully online process. At some brokers it's as quick as opening a new Gmail account, at some brokers it takes a couple of days until they do some background check on you.
Instead of storing money on it you will store your shares on this though, so you definitely need this to buy Caterpillar shares and to store them. You will pay cash to buy those Caterpillar stocks. This cash first needs to be sent deposited to your broker. This is usually super easy and quick, actually even easier than opening your brokerage account. At some brokers, you can deposit to your investment account even from different electronic wallets like Paypal, e.
You have the account, the cash, and the share target. The last step is to press the buy button! You log in to your online brokerage, search for Caterpillar share, insert the number of shares you wish to buy, and click buy, which will initiate the purchase of shares in trading lingo: execute the buy order.
A couple of hints around this: when placing an order, you can choose from different order types. The market order buys at the actual market price, while the limit order allows you to specify the exact price at which you want to buy the share. You are not finished after you purchased your Caterpillar stock.
Now it is key to monitor your investments. This basically means following your investment strategy. If you bought the Caterpillar share for holding it for a longer term, you might participate in the annual meeting and collect all the news and information about the company. If you plan to sell it shortly after you see some increase in the price, you might use different position management tools.
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