Epiphany Investing

Searching Out the Optimal Portfolio of “Revelation” Stocks

Adding Caterpillar to Secular Trends Portfolio (CAT)

Posted on | September 10, 2008 Time: 1:52 pm |

Yesterday’s bloodbath in energy, industrial, and other commodity-based stocks was a clear sign of panic, one of those rare moments when investors need to be ultra-aware and ready to step in…even if that step is towards a fleeing crowd. Peabody Energy (BTU) was purchased yesterday as a 4% position, and today we will be opening a 2.5% position in Caterpillar (CAT), a company once thought to be just a cyclical industrial play.

Things have changed, mainly because Caterpillar has grown international revenues so impressively over the past few years. Instead of having earnings chiefly derived from one nation’s business cycle (U.S.), they are now serving dozens of layered business cycles, the sum of which serve to really smooth out earnings. Caterpillar has recorded record earnings and revenues while its domestic market is at a standstill, especially in the industries served by CAT such as construction, mining, and long-haul trucking.

I’ve published quite a bit of commentary on Caterpillar, and our thesis is an organic extension of what we’ve been watching them do for many quarters. Some of the most relevant postings are below:

July ‘08 - Caterpillar Transforming Before Our Eyes (Investopedia Advisor)

Feb ‘07 - Breakup Value Calculation - CAT $85 (24/7 Wall St.)

CAT trades for a forward P/E of less than 10, and a PEG ratio of .88 - and I feel the 5-year growth rate is currently assuming more cyclical trends, so this should come up over time. Given how much CAT has been beaten down with the rest of the industrials, it looks like they’re going to have to fight for every bit of multiple expansion the company deserves.

I am willing to wait it out, and reap the incremental rewards. I am targeting a 4% final position, but we’ll be averaging in on this one just in case the markets remain skittish to the downside in the coming weeks.

-purchased 2.5% position at $62.70

Ryan Barnes

  • Share/Bookmark
Category: Agriculture, Secular Trends Portfolio
Tags: > > >

Comments