🐛 Caterpillar's Cimb Continues

Plus, Tick-tock! Political merchandise takes a shiny new turn.

September 27, 2024

Happy Friday afternoon to everyone on The Street. Here's a snapshot of where markets ended the trading session, plus tomorrow's trade idea delivered to you today.

  • 🟨 | US stocks were mixed on Friday. The Dow Jones Industrial Average finished up 0.3%, driven by positive inflation data, while the S&P 500 fell 0.1% and the Nasdaq fell 0.4%, impacted by a drop in Nvidia shares.

  • 📈 | One Notable Gainer: Wynn Resorts stock jumped 6.8% after Morgan Stanley upgraded it to overweight, citing its stability in Las Vegas and new details about its UAE project as key growth drivers.

  • 📉 | One Notable Decliner: Cassava Sciences dropped 12% after agreeing to pay $40M to settle SEC charges over "misleading statements" made in 2020 about a clinical trial for an Alzheimer's treatment.

  • 🐛 | Tomorrow's Trade: Caterpillar’s Climb Continues. Scroll down for more.

GO DEEPER

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TOGETHER WITH THE INVESTMENT JOURNAL

Old wells leak methane, but one company grows rapidly by plugging them. 

S&P 500 Heatmap. Credit: Finviz

All Stock Heatmap. Credit: Finviz

Global ADR snapshot. Credit: Finviz

MARKET MOVERS

BMY (+1.6%) FDA approves Bristol Myers Squibb’s schizophrenia drug, the first new type of treatment in decades (CNBC)

NVO (-2.9%) Novo Nordisk’s Wegovy-Fueled Gains Fading as Analyst Doubts Grow (Bloomberg)

RKLB (+12.5%) Rocket Lab soars to new 52-week high on signs that revenue growth can take off (Seeking Alpha)

GL (-4.7%) Globe Life says it may face EEOC lawsuit over alleged discrimination (Reuters)

NVDA (-2.2%) Nvidia Has 'Two Glaring Holes' In Its Data Center Offering (Investor’s Business Daily)

OVERHEARD ON THE STREET

WSJ: U.S. safety officials urge Boeing and FAA to fix a rudder flaw on 350 Boeing 737 jets after a United 737 MAX incident in Newark.

FT: Intel and the US are racing to finalize $8.5bn in funding by year’s end, as Intel faces business struggles and possible takeover interest.

Reuters: The UK competition regulator cleared Amazon's $4 billion AI partnership with Anthropic, ruling it doesn't qualify for deeper investigation.

QZ: WeightWatchers CEO Sima Sistani has stepped down, replaced by former Shake Shack CEO Tara Comonte, amid challenges from weight loss drugs.

The Independent: Trump Media co-founders Andrew Litinsky and Wesley Moss sold nearly all their 5.5% stake in DJT, worth $100 million, after a lockup agreement ended.

TOMORROW’S TRADE IDEA, TODAY

Is Caterpillar Becoming a Butterfly?

Not Done Yet

Heavy equipment giant Caterpillar (CAT) has seen its shares jump by a third YTD, outperforming the S&P 500 by around 8% over the same period. Despite these impressive returns, Barron’s analysts believe Caterpillar may still be in the cocoon. 

The firm believes that more upside could come from Federal Reserve rate cuts, the company’s strong balance sheet, and China’s extensive stimulus plans.

Solid Foundation

The stock is currently trading around 17x times 12-month forward earnings, which is right at its five-year average. According to analysts, this means that its current price does not yet fully reflect the strides it has made in improving profitability and efficiency. 

Caterpillar CEO Jim Umpleby has been on a crusade to cut costs and expand its products. Now it is starting to reap the rewards of those efforts. Profit margins are up around 9% since Umpleby took the helm. 

The company currently has around $35 billion in free cash flow, and debt levels that are around a third of its EBITDA. It has also initiated a $25 billion stock buyback program.

High Rise

Asia-Pacific sales — of which China accounts for half — make up around 20% of Caterpillar’s total revenue. Chinese officials recently announced plans to kickstart the economy with its biggest stimulus since the pandemic. If successful, these measures could lead to better revenue and profit margins for the company. 

Additionally, mining companies have cut back on their spending in the last decade or so by around 30%. As a result, many mining companies now have aging equipment that will need to be replaced. Caterpillar could benefit from an increase in demand and pricing power.

“Buy the dip” is a classic investing axiom. But “buy the rise” can be as effective — and if Barron’s is to be believed, Caterpillar might just be one of those opportunities.

Are you bullish or bearish on Caterpillar (CAT) over the next 12 months?

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TOGETHER WITH THE INVESTMENT JOURNAL

Old wells leak methane, but one company grows rapidly by plugging them. 

ON OUR RADAR

CNN: Americans are expected to "trade up" on holiday purchases, choosing pricier options as retailers deepen discounts, Adobe Analytics reports.

CNBC: At an all-hands meeting, OpenAI CEO Sam Altman stated there are no plans for him to receive a large equity stake, despite board discussions.

AP: As a strike nears, East and Gulf Coast ports seek federal intervention to force dockworkers to negotiate a new contract in good faith.

AP: Diners are opting for home-cooked meals over restaurants due to easing grocery inflation, impacting chains like McDonald’s and Darden.

Axios: Former President Trump is launching a watch collection priced up to $100,000, adding to his recent merchandise promotions.

YESTERDAY’S POLL RESULTS

🟩🟩🟩🟩🟩🟩 🐂 Bullish

🟨🟨🟨🟨⬜️⬜️ 🐻 Bearish

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