Help you invest

May 9, 2023

I have begun to write a third book for 2023. This one is specifically for novices who want to learn how to invest properly using sound strategies and tactics.

In addition to the book titled Maverick Investor, there will be regular articles and blogs written for high school and university students, career-changers, and retirees serious about investing.

For my Trader Wizard Investment Club (TWIC), I selected eight fundamentally sound Dow 30 components for ongoing case studies: Apple (AAPL), American Express (AXP), Caterpillar (CAT), Cisco Systems (CSCO), Chevron (CVX), Disney (DIS), Coca-Cola (KO), and Nike (NKE). Some of these may subsequently be replaced, and I may increase the portfolio to ten companies.

I chose Dow 30 components because the names are well-known, the stocks are considered blue-chip, and there is a plethora of helpful information, including from Value Line.

The eight companies represent 25% Technology, 25% Services, 25% Consumer Goods, 12.5% Industrial Goods, and 12.5% Utilities, which is good industry diversification, and the stocks represent a choice of Value, Growth, and Income securities. Moreover, just four of these eight stocks represent 65% of the Warren Buffett Berkshire Hathaway $350 billion portfolio.

This week, the Value Line quarterly report for Caterpillar is positive:

Caterpillar generated impressive first-quarter results. March-period sales increased 17%, to $15.86 billion, due to strong price gains and higher volume, which together overcame negative currency impacts. Operating profit of $3.3 billion resulted in an operating margin of 21.1%, reflecting lower-than-expected manufacturing costs. Taking these factors together, adjusted earnings surged to $2.55 billion, or $4.91 per share, excluding $586 million in restructuring costs.

End markets are healthy. Caterpillar concluded the first quarter with a backlog of $30.4 billion. Strength in this important metric underscores solid conditions in key categories. The Construction Industries unit remains positioned to benefit from government-related infrastructure spending, which will likely overcome softening conditions in the residential construction arena. Likewise, business for Caterpillar across China, as well as in Europe, Africa, and the Middle East, ought to gain from public projects. As for the Resource Industries unit, commodity prices remain at levels that should drive investments in mining equipment. In the Energy & Transportation division, solid end-market demand for engines & turbines and power generation machinery should help.

But the company is unlikely to maintain bottom-line momentum. Solid top-line growth is probable for the full 12-month period, and second-quarter sales should be sequentially stronger according to seasonal patterns. Year-over-year comparisons ought to weaken during the latter months of 2023, though, as dealers accelerated restocking efforts during the second half of last year. Also, the favorable impact of cost absorption in the first quarter is unlikely to be repeated. Margins are liable to be more modest on a sequential basis in 2023. All told, the strong start has led us to raise expectations for the year, and an aging fleet suggests additional sales and profit gains are probable in 2024.

Sector weakness has weighed on Caterpillar’s share value of late. In our view, this price action has brought CAT stock into oversold territory and serves as a potentially favorable entry point for momentum accounts.

Dominic B. Silva May 12, 2023