Caterpillar's double downgrade is 'excessive,' don't run away from the stock, expert says

Caterpillar just got bulldozed by UBS.

The firm gave a rare double downgrade from buy to sell with analysts warning that an earnings decline in 2020 had not yet been priced into the stock.

Mark Tepper, president and founder of Strategic Wealth Partners, disagrees.

"I wouldn't be running away from this stock. I think the double downgrade was excessive," Tepper said Tuesday on CNBC's "Trading Nation."

UBS' call is an outlier on the Street. The stock has an average overweight rating and $150 price target, according to data pooled by FactSet. That's 8 percent higher than current levels. UBS' $125 price target marks 10 percent downside.

"The hurdles are low, so the potential for outperformance is there," Tepper said. "They've been dealing with rising costs over the course of the last few years, but it seems like their recent price increases should offset that. And let's not forget, they had record profits last year."

Caterpillar posted record profit of $11.22 a share in fiscal 2018, up 63 percent from a year earlier. Full-year sales rose by 20 percent.

"Over the last several years they've really been focusing on restructuring the business, which should help with profitability going forward," said Tepper. "Loan growth is on fire and commercial and industrial loan growth is leading the way, growing by over 10 percent per year so that loan growth is good for profit growth. So we think there's potential for the stock to go up from here."

But Boris Schlossberg, managing director of FX strategy at BK Asset Management, said Tuesday he is "still dubious" on the stock given global growth fears.

"CAT has really become a proxy for macro global growth in many ways," Schlossberg said on "Trading Nation." "The thing that's going to drive the stock much more than anything individual to the company is really how well the global PMI has gone."

Global economic growth continued to slow at the beginning of the year, bottoming at its lowest level in 2½ years in January, according to J.P. Morgan's global composite purchasing managers index. The U.S. remained strong, but France and Italy saw growth contract while China, Japan and Russia slowed.

"If they can stabilize and begin to perk up, that would give me a lot more confidence that CAT is going to benefit from that recovery. Until then, I think you've pretty much got to stay away," Schlossberg said.

Caterpillar shares fell 2 percent on Tuesday, the worst performer on the Dow. They were down 0.3 percent in Wednesday's premarket but were still up 9 percent this year.

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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 CNBC and 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.

Follow Michael Santoli on Twitter @michaelsantoli

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