Caterpillar is ‘out-of-control overbought’ ahead of earnings, strategist says

Over the last year, Caterpillar's shares have bulldozed their way to new records. Yet that sudden and steep rally has at least one market watcher questioning its sturdiness.

"The stock has had a great run but it's kind of gone vertical in the last two months," said Matt Maley, equity strategist at Miller Tabak, on CNBC's "Trading Nation" on Wednesday. "This is out-of-control overbought."

Caterpillar's relative strength index (RSI) reached the 93 mark this week, overtaking the S&P 500 Index's 88 level. The measure, which tracks the speed and scale of gains in a stock, suggests Caterpillar shares are in overbought conditions.

The construction company's price-to-earnings (PE) ratio is also well above that of its peers. Its 12-month PE sits at 118 times trailing earnings, while competitor Deere & Co. has a PE of 25 and the S&P 500 nearly 23.

When it reports before the opening of Wall Street's bell on Thursday, Caterpillar earnings are expected to rise over the fourth quarter that ended in December, thanks to a stronger economy in the back-half of last year. Adjusted earnings are forecast to more than double to $1.77 a share, while sales should rise by 23 percent.

'Well in its uptrend'

A return to growth in North America construction in the U.S. in the second half of 2017 supported gains in Caterpillar shares. Construction retail sales have steadily improved over the last six months of 2017, after turning positive in May. Caterpillar generates 47 percent of its revenue from North America.

Over the first half of last year, Caterpillar shares rose 16 percent. Gains picked up from July to December, with the stock rocketing 47 percent higher, breaking new ground on all-time intraday highs.

Caterpillar shares ended 2017 with gains of 70 percent, the best one-year performance since 2003.

Furthermore, the stock has climbed 7 percent in 2018, putting it on track for its 10th straight month in the green. January's gains alone have exceeded the industrial sector's 5 percent rise.

"This stock could pull back 5, even 10 percent, and still be well in its uptrend," added Maley. "It would be natural, it would be healthy and I hope it happens because I think if you pull back 5 or 10 percent the stock will actually have more upside potential down the road."

Analysts are generally bullish on Caterpillar shares. The majority of brokerage firms surveyed by FactSet have an overweight rating on its stock and a $170.88 price target, implying a 1 percent upside from current levels. Melius Research has the highest price target at $200 and Langenberg the lowest at $100.


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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