Caterpillar: A Rebounding Economy Play

The U.S. and global economies are starting to recover, and that's good news for Caterpillar (CAT), hence I'm reiterating my buy rating for the company's shares, first recommended on April 13, 2009 at a price of $33.02. If you bought CAT in April 2009, you're up a smart 75%.Look for the rebound in construction and agriculture equipment to continue in the year ahead as the economy strengthens and as fiscal stimulus-related infrastructure spending around the world continues. Caterpillar's solid cost controls add to the positive mix.

The First Call FY2009/FY2010 EPS estimates for CAT are $2.01 to $2.72. That $2.72 FY2010 EPS estimate will likely prove to be low.

Additional positives: A further weakening in the U.S. dollar would boost CAT's international sales by making the company's products cheaper for foreign buyers. A second fiscal stimulus package by the U.S. government (possible) would represent another plus.

Technically, Caterpillar's stock chart is strong -- an uptrend and a price that continually stays above the 50-day moving average -- a sign that institutional investors are adding to and establishing positions in the stock. Further, CAT recently re-tested psychological resistance at $60. According to my analysis, CAT is headed much higher.

2010 Outlook: Caterpillar is a long-term play, but if you're looking to sell CAT within the year, take your profits after it rises to $77 to $79, if it fails to clear $80.

Stock Analysis: Caterpillar is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in CAT now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your CAT position before March 2010. Sell/Stop Loss if you were to buy shares in this company: $33.50.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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