Jim Cramer was shocked when the news that iconic industrial company Caterpillar (CAT)'s Peoria, Illinois headquarters was raided by Federal agents last week — but it didn't scare him off from recommending the stock.
"Accounting issues almost always equal sell, but in this rare case, I think Caterpillar's declines already bake in the potential problems and its business is getting so much stronger that I think the story is too good to ignore with the stock down at $92," the " Mad Money " host said.
The timing couldn't have been any worse, either, as Caterpillar's stock was on the verge of hitting $100 for the first time in two years. But when everyone from the IRS, to the FDIC and the Department of Commerce got involved, it traded down to $94.
On Tuesday, The New York Times followed up a story with details of accusations on tax and accounting fraud that were made against Caterpillar in a report commissioned by the government. That article sent the stock down to around $91, just below where it closed at $92 on Friday.
"What really kills me here, though, is that this federal raid on CAT's headquarters comes at a time when the company's actually doing quite well, with some favorable sales trends for the first time in ages," Cramer said.
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Cramer even heard whispers on Wall Street that the company could be ready to raise its earnings guidance soon.
The story about Caterpillar first came to light approximately three years ago when the Senate Permanent Subcommittee on Investigations published a report on Caterpillar's offshore tax strategy, reviewing questionable methods to move most of its profits from the U.S. to Switzerland, where it only pays a 4 to 6 percent tax rate.
The actions weren't illegal, Cramer said, but were more what he described as a "tax avoidance grey area". The company later disclosed that it had been subpoenaed by federal investigators and the IRS was seeking more than $2 billion in income taxes and penalties. The issue faded to the background as Caterpillar's business began having a tough time in the next few years.
While Cramer doesn't know which agency is spearheading the investigation, he does know that Caterpillar's business is in comeback mode. After four straight years of declining sales, the company's end markets have started to turn around.
The Times article conceded that no charges have been filed and it is still unclear whether the government's investigators agree with the report's findings.
Additionally, last October, Caterpillar's chairman and CEO Doug Oberhelman announced he would resign from his positions earlier than planned. Cramer didn't understand the timing. The business was finally turning, and then Oberhelman left.
Typically Cramer always tells investors to sell when there is an accounting irregularity, but he said to make an exception for Caterpillar.
The stock has lost approximately $4.2 billion in market cap in response to the government raid story. But according to that 2014 Senate report, the company cut its tax bill by $2.4 billion in 13 years, and Cramer noted that the IRS is only seeking $2 billion in fines.
"Even if the company is really guilty as sin, the potential back-taxes and penalties already seem to be baked into the stock price," Cramer said.
Combined with the fact that Caterpillar's fundamentals are improving and the company is in favor with President Trump, Cramer thinks the stock is worth buying at current levels.
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