Hindsight is 20/20 — but going forward, I'm taking a stand that can benefit all stock investors

Published Sun, Apr 7 20246:03 PM EDT

We've become prisoners of short-rate forecasts. Yeah, the ones controlled by the Federal Reserve. But those fearless investors who have broken out of this self-imposed mental jail are enjoying bountiful returns. Sure, it appears to be nothing but alchemy to the jailers and their powerful protagonists in the media. But does it matter? They don't asterisk the returns as "done by ignoring the Fed," when you journal the stock profits to your bank account despite where we are in the interest rate cycle. Still these returns either seem beyond the ken of most investors or they are hidden beneath the foolish rhetoric of so many who pontificate about stocks and the impact of short rates on them. No one sets out to obfuscate. But the outcome is one of intellectual impoverishment. That's because there is a relentless Fed official-strategist-journalist complex that could blunt the realm of any stock picker and dismiss their tiny sliver of the universe unless they are traders nimble enough to choose "names" that work between cycles. I find the complex and its trader amen corner needless even as their dogma has captured the microphone. I don't want to fall back to the cliched, "I have seen this movie before," simply because I abhor cliches. But there have been many times when leading intellectual billionaires and their minions have lectured us about the inability to profit from this pre-rate-cut moment. Their primary shibboleth: "Don't you dare try to make money without Fed rate cuts." Plus, the disparate phalanx Fed officials seem to enjoy roiling the markets with their off-handed chatter — July as the first rate cut since the tightening paused and three times total for the year? or October and two times? or 2024 no times? — fully recognizing that most journalists will hang on to their every reported word. Sometimes I think, facetiously, that everyone in the complex is paid by the spoken word. The traders drown out the concept of investing in stocks right now and encourage and entice you into their Fed rate cut penitentiary. You must not allow your brain to be taken prisoner. Instead, we — you and I — must be willing to cast aside their dogma and discover the ideas that don't comply with their spurious "wisdom." We aren't going to fall prey to the notion that without economic weakness we can't make money. That's right, those of us still in the hunt for investing profits can't afford to be mentally bamboozled into thinking that money can't be made at this time. We cannot let these Fed Babbitts blind us to purloined ideas. We will not succumb to the tyranny of false cycle history. We know that once we grow weak enough to need Fed rate cuts, whole swaths of sectors will stop growing and their stocks will sink into S & P 500 oblivion. In other words, let's stop making this a horse race about a course that's about how many cuts over how many months — and, instead, make it about investing. As you can tell, I feel aggrieved. Anything that makes it more difficult to make money is going to get one in the kisser from me because we are not self-righteous — we are just hungry. We want equal time. At least, we are trying to make people wealthier. Let's get less intellectually wayward and more hardcore capitalistic. Consider the case of Caterpillar . Here's a storied earthmoving company, founded in 1925, that was captive to the business cycle for as long as anyone can recall. Oh, it accepted its fate for many a year. Sometimes, it even doubled down in cyclicality like 13 years ago when it went all into another cycle, the coal "super-cycle." It bought a storied American metal-bender, Bucyrus-Erie, in 2011 for $8.8 billion to take advantage of the coal moment. Plus, Bucyrus was huge in China, so huge that Caterpillar needed Chinese approval to close the deal. The Bucyrus gambit was part of a larger strategy of diversifying away from the U.S. economic cauldron and embracing the secular growth of China. It also coincided with the purchase for $580 million of Era Mining Machinery and its subsidiary Siwei, China's fourth-largest maker of hydraulic roof supports for mining in the summer of 2012. Incredibly after discovering what it called a "deliberate, multi-year, coordinated accounting misconduct" Caterpillar management wrote off almost the entire acquisition of Era just six months later, destroying half of its earnings for the fourth quarter of 2012. Let's call that questionable due diligence. Caterpillar just couldn't seem to get it right as the coal supercycle, like all supercycles, peaked out right about the time of the acquisition's closing. Plus, the China-centric strategy became the emphasis of the company both in mindset and more importantly on Wall Street. Instead of being hostage just to the vicissitudes of our fickle business cycle Caterpillar became victimized by the Chinese real estate debacle that is central to their vast slowdown that they are still trying to come to grips with. You started thinking it wasn't just bad luck, maybe it was in the DNA of a company from the heartland, Peoria, Illinois. We got to watch the diversification "strategy" fail, and fail spectacularly with it all happening under Doug Oberhelman, the congenial CEO who ascended in 2010 and then, unceremoniously was dumped from the Caterpillar masthead in 2017. Oberhelman was replaced by Jim Umpleby, from the Solar Turbines subsidiary of CAT. It sounded renewable but actually, the division designed and manufactured industrial gas turbines for onshore and offshore electrical power generation. Even as Umpleby was steeped in the culture of the previous administrations, he decided to break with the diversification and acquisition strategy as well as the China-centric game plan. He shared it with Wall Street but, despite the facts, many analysts still resist it. Umpleby's Caterpillar embraced something new, profitable growth, and he set out to build the best technological machines money could buy. As he explained to me, the eras of undisciplined spending were over. Instead, he would use profits to reward shareholders and build to suit, rather than just building for the sake of building. He didn't tell me as much but Umpleby had his company join the ranks of Deere , Parker-Hannifin , Cummins , and Illinois Tool Works , the American companies who willed themselves to be the most effective in their sectors. The build-to-suit strategy was about giving the clients, like the power companies, what the customer wanted, not what Caterpillar had, even if it meant giving them advice or software or both. Nothing gigantic and yellow — something cerebral and pragmatic. Included in the smart-tech, self-help package of the new, Umpleby Caterpillar? A decision not to issue stock but to buy it back. A company with 591 million shares in 2018 slimmed down to 504 million last year. The new Caterpillar would become a sustainable company trying to help electrify the country through its energy transition. If you want to know more go listen to the "Beyond the Iron" podcasts on Caterpillar's website They are enlightening — and to the best they can be — personal and entertaining. Caterpillar also became integral to the huge buildout of the Permian, the gigantic field of oil and natural gas in west Texas. Turns out you need earthmovers as much as you need drillers. With solar you need undulating man-made hills, with wind you need roads and bases and servicing, Caterpillar-intensive all. At the same time that Umpleby's CAT was embracing capital and technological discipline, President Joe Biden and Congress passed first, the Infrastructure Investment and Jobs Act in late 2021 and then about nine months later the Inflation Reduction Act (IRA), a nice piece of legislative legerdemain. The Infrastructure deal committed $1.2 trillion to rebuild America's roads bridges and rails while the IRA authorized $783 billion for clean energy and reduction of greenhouse emissions. Talk about Caterpillar heaven and the desire to use American equipment amounted to a decisive advantage versus the undercutters from overseas. Incredibly, at the exact, fortuitous time some of the giant tech companies, Alphabet , Microsoft , Amazon and Meta Platforms — all Club names — needed to build out a network of giant data centers that consumed a huge amount of electricity. Literally, out of nowhere, in 2023, these data centers drove up electricity use by 5%, the first growth in two decades. The grid's rebuild became an instant necessity. Throw in myriad e-commerce warehouses for Amazon, and you stretch Caterpillar to the limit. Maybe it was serendipitous, or perhaps it was just good business, Caterpillar decided to move their headquarters out of Illinois and into Irving, Texas. It was a nice metaphor that captured the new CAT, one that landed smack in the middle of the state most committed to wind and solar as well as the one with the most energy exploration. I managed to score an interview with U.S. Infrastructure Czar Mitch Landrieu last year. He told me that despite the passage of the legislation only about 10% of the spending had occurred. That, and all of the above made me hungry to own the stock, despite its China-centric and fed rate wire history. We bought it too soon, first in the mid-$200s per share. But we kept buying it down. Throughout the stock's decline, analysts fought us tooth and nail. We heard an endless series of sell calls, most of them rooted in the business cycle. They were all trapped by the Fed rate prison I described above. They were part of the complex of ignorance. Every time we would buy some CAT we would hear the jeremiads of analysts who simply could not get their heads out of the Fed universe and, at that time, the rate increases that were still going on. We didn't care. We knew the company had gone secular with a huge federal tailwind that had little to do with China's stagnancy or Federal Reserve gasbags. We weathered two quarters where analyst after analyst bemoaned inventory builds even as we knew CAT would need all the equipment it could get for the demands I just described. I was so beleaguered I brought Umpleby on to "Mad Money" and he said wasn't concerned about their worries. He needed the inventory. We bought more. The analysts hectored us again — we took it personally — as the stock fell to $208 around. We rounded out our position and lowered our basis. The bears just wouldn't let go of the concept that the new CAT wasn't subordinate to the cycle or China. At the same time, the Fedspeak embraced tightening. Then October 2023 came, the Fed pivoted, and the bears had no choice but to capitulate one by one. They are still capitulating. We caught a CAT move to $300 where, in a fit of pique, I said we had to stop battling and take the win and move on to an easier chit in this infrastructure and power gain. We did. We bought Eaton , a maker of electrical components and power management solutions. We left Caterpillar way too early. But you can't bemoan the wins, just the losses. And, buying Eaton, which also has been winning from the data center-building wave, came before the stock surged more than $100 per share to record high after record high where it ended Friday above $330. When I look back at the Caterpillar situation, I see two things. One, we were right about how Umpleby put the new CAT on a sustainable path as part of the nation's energy transition while exercising financial discipline —buying back stock and increasing the dividend by 8%, continuing the historical increase in dividends for 29 years and maintaining its dividend Aristocrat status. The biggest customers were data centers and oil and gas. The shareholders and the customers got elevated status. The old CAT was gone. But two, CAT proceeded to go up $75 above where we sold it, even as the Fed did not cut rates. That move was not supposed to occur. I write that because I was attuned to the Fed-to-journalist-and analyst dogma, attuned much more than I should have been. I wish I could blame them for my early sell, I can only blame myself because I momentarily succumbed to the endless chatter that I despise so much. I am angry that I let them rent so much space in a limited cranium. The nonstop, breathless horse-race mentality of the coverage of Fed officials made it almost impossible to stay long through a period of outperformance that rivaled all but the best of techs. The group that had once been hostage to the cycle had broken free when it came to earnings, but traders and journalists could not shed the old narrative. Suffice it to say most investors missed the moves precisely because of the Fed-media-trader complex I continually allude to here. I can't destroy the foolhardy faux-linkage and the trader mentality it breeds. But I can rail against it. Here's what I pledge. We will not be deterred in our hunt for profitable companies with good stocks that have reinvented themselves and have managed to break free of the cycle. Nor will we fall prey to the short-termism that follows every Fed governor's well-chronicled Rotarian speech. I wish they would come to speak at the Summit Elks Club. I'd dangle them from the rooftop bar. But permit me my critique and recognize that the tyranny of the news cycle and its cascade to our viewers stops right here at the CNBC Investing Club. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Jim Cramer at the NYSE, June 30, 2022.

Virginia Sherwood | CNBC