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Caterpillar stock is 'hands off' except for one reason, trader says

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Bank of America downgrades CAT to underperform

Bank of America is warning on Caterpillar shares.

Analysts on Monday said the machinery maker could see a sharp decline in profits on a "severe capital spending downturn."

Quint Tatro, president of Joule Financial, agrees with the warning.

"There's a lot of optimism starting to come into play that when we get out of this we're going to start to see a significant economic rebound, but ... Caterpillar has more going on than just the coronavirus," Tatro said on CNBC's "Trading Nation" on Monday, pointing to a slowdown in spending in the energy and mining space as reason for concern.

Bank of America analysts predict that earnings could fall by 48% in 2020 and remain depressed for years to come.

"The stock [is] still trading at 20 times forward earnings, which is really expensive for a stock that declines 48% with their earnings, so I think you have to look at it from that standpoint, if you're looking at a growth name," said Tatro.

However, there is one reason to keep holding the stock, says Tatro.

"We still own some from a dividend perspective, but from a growth perspective, I think it's hands off," said Tatro.

Caterpillar yields 3.6%, higher than the average 2.1% dividend yield on the S&P 500.

The stock has managed to outperform over the past month, climbing by nearly 15% and roughly seven times the broader market.

Katie Stockton, founder of Fairlead Strategies, says that makes it susceptible to weakness.

"It's definitely been a nice relief rally. ... It really can't handle the bad news when that occurs, where you have this nice run up ahead of the bad news and an overbought condition that had been in place for a prolonged period. So now this gap down and loss of short-term momentum does suggest that we'll see some kind of retest, maybe not of the March low but some kind of retracement," Stockton said during the same segment.

Caterpillar hit a low of $87.50 in mid-March. It would need to fall 23% to reach that level again. 

"It was [also] in a long-term downtrend going back to early 2018, so that stock was already at a disadvantage relative to the broader market," said Stockton.

Disclosure: Joule Financial has a position in Caterpillar.