Trader: Despite trade war tensions, Caterpillar’s fundamentals remain strong 

  • Caterpillar's Q2 earnings beat estimates, but trade war fears continue to weigh on the stock.
  • Shareholder Stephanie Link believes the company's fundamentals remain strong and that "if you have patience, you own it."
  • Shark Tank investor and O'Shares ETFs Chairman Kevin O'Leary says the stock is "stuck in a ditch" and that there will be a better entry point in a few months.
  • Shares of Caterpillar are down nearly 9% this year, and the stock has fallen 17% from its all-time intraday high of $173.24 hit on January 16.

Caterpillar finished 2017 as the second-best performing Dow stock, with a gain of 70%. But so far 2018 has been a different story. Investors have shied away from the stock due to escalating trade war tensions as well as fears over the impact that steel tariffs will have on Caterpillar's bottom line.

On Monday the company reported second quarter results that topped analyst estimates -- including a 24% growth in sales and revenue -- and also raised full-year guidance. But despite the blowout quarter, the stock still finished the day in the red.

Stephanie Link, Nuveen managing director and head of global equities research, owns Caterpillar. She believes the company's fundamentals are intact, and that it's unfairly getting hit by trade war rhetoric.

"They just grew revenue, up 24%, margins expanded 500 basis points, it's down 19% from its high, down 8% on the year, trades at twelve times forward. That's all you need to know," she said on Tuesday's "Halftime Report."

A Caterpillar 834B dozer moves coal at the Savage Industries processing facility in Price, Utah.
George Frey | Bloomberg | Getty Images
A Caterpillar 834B dozer moves coal at the Savage Industries processing facility in Price, Utah.

"If you have patience, you own it. If you think there's a peak in the cycle, which I don't believe, you don't. And if you think there's a trade war happening you need to make your decision based on that," she added.

In addition to trade war concerns, some investors are staying away from the stock because they believe the cycle has peaked, meaning that, after years of growth, sales will begin to contract.

Barclays analyst Adam Seiden downgraded Caterpillar to equal-weight on Tuesday because he believes continued growth is "already appreciated." In a note to clients he wrote that in the agricultural space he prefers Deere and CNH Industrial "which are at similar valuations [to Caterpillar] but are earlier in their market cycles." He also slashed his Caterpillar target to $155, down from $170.

Virtus Investment Partners' Joe Terranova disagrees with the call, but isn't buying the stock due to lingering concerns over comments the CFO made during the first-quarter earnings conference call.

Following a Q1 beat in April CFO Bradley Halverson said the results would be the "high-water mark for the year," which sent Caterpillar shares tumbling. While the company later clarified that the comment was intended to underline the strong quarter rather than imply a slowdown in coming quarters, Terranova notes that the stock has been flat in the three months since.

"It confused investors and in terms of stock performance it [Caterpillar] hasn't recovered," Terranova said on Tuesday's "Halftime Report" of Halverson's comment. "You're seeing earnings that dismissed what he said, but in terms of stock performance you are not."

Like Stephanie Link, Jon Najarian believes Caterpillar is largely in limbo until Washington trade policies are clarified.

"I know everybody wants to focus on mining and the big tractor business, but they [Caterpillar] have exposure to agriculture," he said on the "Halftime Report."

"A lot of that has been put on the sidelines until farmers get more clarity as far as trade and whether or not soybeans will be subsidized and all the rest. I think there's still money to be spent here so I like Cat," Najarian added.

Shark Tank investor Kevin O'Leary thinks Caterpillar is stuck in a trading range and that there might be a more attractive entry point a few months from now. "I like it, but when a narrative becomes political it's always dangerous for a stock. And this is about trade wars now and I think it's stuck in a ditch. I can wait a few months and buy it later; I'm not going to lose anything," he said on Tuesday.