Wednesday, November 22, 2006

CAT in the doghouse?
Mea culpa for being persona non grata. I am making an early new year's resolution - a promise to update the blog regularly, atleast once a month.

The market in the meantime has been on a rip roaring ride. There are two aphorisms that come to mind, In a rising market everyone is a genius and a rising tide lifts all boats. So I suspect most stocks have done well, the key though is to beat the market and I will be doing a post mortem of all my picks and comparing them to the S&P 500 before the year ends.

Heavy machinery stocks have taken a huge beating while the market has been on a tear, mainly because these are cyclical industries and the US economy is slowing down, probably moderating is the right word.

One stock that is a fundamental value play is Caterpillar (NYSE : CAT). Caterpillar is being unfairly punished by the market it dropped almost 10% after last quarter's announcement. I believe it is a good buy based on the following
- on a strictly value analysis DCF the share price should be $68.00 (based on a Free Cash Flow growth rate of 8% for the next 10 years and 3% after that)
- the P/E ratio is 11-12x is below the historical norm of 14x
- although the residential construction is slowing down and the US economy is slowing down, this is being more than adequately compensated by international growth in mining and the China infrastructure boom, indeed today the company announced it was moving its Asia headquarters to Beijing from Tokyo. The 2008 Beijing Olympics should also give the construction boom in China a greater thrust.
- the company gives a 2% dividend

I believe that CAT will return a 12% gain over the next 12-18 months.
Since the stock is currently in Wall Street's dog house and probably will stay there for some time, it is probably wise to start buying in smaller blocks and lower your cost basis. (Disclaimer : I own CAT and plan to increase my holding)
Other industrials worth a look are Cummins (NYSE : CMI), and Ingersoll-Rand (NYSE : IR). Cummins is particularly interesting at a P/E of 9.5
All these three stocks CAT, CMI and IR are strong industrials, with great brands and economic moats, currently beaten down that are keepers. Even if you dont buy them make sure they are on your watchlist.