Caterpillar Inc. (NYSE:CAT) is one of those stocks that many investors view as an economic bellwether.
When the domestic or global economy is good, CAT stock is chugging along. There’s more construction, there’s more infrastructure projects, there’s more mining and drilling operations going on.
They fix equipment they may have replaced in richer times. Governments stop spending on big projects.
That’s why what happened to CAT stock — and by extension the entire market — earlier this week was disconcerting.
The Concerning Reaction to CAT Earnings
CAT came out with earnings that blew away its estimates as well as analysts’ estimates, including their ‘whisper numbers’.
Whisper numbers made their way into the markets during the dotcom build up. Analysts would say one number but whisper about a higher number. If a company hit analysts’ numbers but missed their whisper numbers, the stock could suffer.
Anyway, CAT had no problem exceeding expectations. However, during its earnings call, CAT’s CFO said that while they expect a strong year, and raised guidance for the year, they also said Q1 may be the best quarter of the year.
Then 3M Company (NYSE: MMM) came out with a dour outlook and unimpressive numbers.
And that was all analysts needed to see. It looked like the recovery had hit its high water mark for now.
And then the market was simply focusing on all the potentially bad signs that had been floating around, in particular 10-year Treasury yields bumping up against 3%.
That 3% number is kind of the jumping off point for rising inflation, which triggers a new leg of the economic cycle. When that occurs, traders will start to rearrange their portfolios — which means increased volatility as they shift into other asset classes.
Because CAT and MMM are major components of the price-weighted Dow Jones Industrial Average, they brought down the index. And they brought down a lot of exchange traded funds (ETFs) that were focused on industrials.
And when Boeing Co (NYSE: BA) also announced blockbuster numbers, it barely moved the dour needle on the market.
The Bottom Line for CAT Stock
But the fact is, this isn’t CAT’s fault. And it isn’t about the economy. This is what happens in a volatile market. The technicals and fundamentals can almost always be read more than one way. Sometimes they’re read optimistically, other times, pessimistically.
And in volatile markets, an optimistic sign can turn bearish very quickly.
The fact is, CAT is up almost 100% in the past 2 years and has outperformed the S&P 500 by almost a factor of 3. Sooner or later, it was going to have to slow down. Remember, this is a company with an $86 billion market cap currently trading at a PE of almost 40.
Something was going to have to give at some point.
Now it’s off its highs. It will get back to those highs and beyond. Don’t worry.
— Louis Navellier
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Source: Investor Place