OK. After studying this for the past couple of weeks it is very clear that Cat is way overvalued.
Will earnings double, thus bringing the p/e down to a fair value of 15? Yes. By the end of 2012.
No one with a clear sense of value and future value, pays money (buys a stock) to have it eventually be fairly valued in 2 years.
Cat is way over bought. The time has come to short this down to around 70-75. Then it can slowly rise over the next 2 years to around 110, where it will still have a higher than normal p/e which is fine since earnings are still expected to grow after a double from here by the end of 2012.
But to pay $92 today, is very very risky.
Can't agree with you more that CAT is overvalued but I would not short this stock either for the moment. Just like what others said, the DOW seems to be definately poised to go higher from here and CAT will lead, that's just the truth. Money will just pour into funds that hold DIA which will push CAT higher but I had sold little by little in increments since after CAT topped 80's and for people wanting to buy this now, PLEASE.....lol, where were you when this was in it's 40's in 09? That's when I bought tons and I'm RICH now...LOL.
Any increase in union demands in the nothern states will be offset by lower union provisions in the southern states. That is why CAT is building out in the southern states and overseas. Whatever new demands may arise will be more than offset by these new manufacturing centers.
In terms of playing the overbought levels-- proceed carefully with CAT. I've been burned too many times in the past trying to time this thing (missed out on quite a few $3-4 runs). Now, I'm just sitting back on my $80/share position, reinvesting dividends and watching the company news. Wish I still my $64 shares though (would have them if I hadn't tried playing the RSI). Oh well, still made good on them and have a position in the company.
Money will be made in the long term with Cat, no doubt. I believe your $120 is more likely in that timeframe than $150.
I just think that addtional easy money can be made when a stock is way overvalued. There has been a lot of excitement over Cat recently and the runup has been fast.
Given the union contract negotiations coming just starting with Cat having nice profits, the bargaining table is going to heat up.
Like I said, I'm not shorting now hoping to see 75 by year end. I believe we get into January and closer to that contract deadline, negative feelings will cause many to take profits, especially after the new year. No need to take profits now and pay taxes this year.
I believe we see mid 70's by end of January or Feb. I'll be adding to the short position until then.
This kind of hype and greed that has driven the price up so quickly is weak support that will be really hard to sustain.
A pullback is healthy anyway and bound to happen.
The DOW look like it's going higher in the short term. Charts don't lie. CAT is is the clear out performer in the DOW. CAT will go up if the DOW goes up in the short term. Shorting an outer-performer which hasn't had a blown off top yet is just plain stupid. Check the chart, you will see this stock does not make significant drops until a blow off top has been acheived. So, either buy or stay away.
From Investor Glossary:
"A blow-off top refers to an extremely fast spike up in a stock's price, followed by an extremely fast and severe drop in price."
Why do I want to wait until "an extremely fast and severe drop in price" to short. Seems like shorting in the middle of a blow off top is the best.
I'm not saying Cat is a horrible company. They are doing great as a company. The stock price, however, has gotten way ahead of Cat the company. If the earnings do double in 2 years, that does justify today's price of $92. But that's 2 years from now.
There is no way the current price can be sustained. Especially with union contract negotiations under way. Now that Cat is doing quite well as a company, the union will have better bargaining in asking for more.
I'll short from here down to mid 70's by end of January and middle of Feb. Then I'll buy long and hold for the slow ride up to 100-120 by the end of 2012.
I'm no day trader.