This Dow Mainstay Is Screaming ‘Sell’

When you think of stalwart mega-cap industrial stocks, Caterpillar (NYSE: CAT) certainly is one that comes to mind. The earth-moving equipment blue chip, Dow component, and long-time bellwether for the global economy, has been a big winner for investors and traders over the years, and for good reason.

During the past decade, there’s been a huge infrastructure buildup in the emerging markets of Asia, especially China, and Russia, India and Brazil. The massive demand for heavy-duty construction equipment has made the iconic brand a mainstay on big building projects in nearly every corner of the globe.

Recently, however, demand for Caterpillar’s products has waned, and that’s caused a marked slowdown in the company’s earnings growth, as well as a significant decline in CAT shares.

On the earnings front, the company recently released results for the third quarter, and they were anything but impressive. Third-quarter earnings sank 44% year over year, missing consensus estimates by a wide margin. The company reported earnings per share (EPS) of $1.45, down from $2.54 in the same quarter last year. Revenue disappointed as well, coming in at $13.4 billion, down from $16.5 billion in the same quarter a year ago.

The double whammy in the third quarter also came with the company cutting its full-year profit forecast, and the combined malaise caused the stock to sink more than 6% on Wednesday.

So far in 2013, CAT shares are down more than 9%. That’s disappointing for a stock that has logged an impressive gain of more than 200% over the past five years.

Adding more woes to the Caterpillar tale is a confluence of bad decisions and bad luck in its mining division.

The bad decision was the 2011 acquisition of mining equipment company Bucyrus International for the costly sum of $7.5 billion. That bad decision happened to coincide with the global decline in mining equipment demand, the recent slowdown in China’s infrastructure growth, and a decline in industrial commodity prices.

Technically speaking, CAT shares are approaching bear market territory, having fallen more than 15% since hitting their February high. Though the stock has fought back since falling to its low in April, it’s done so in a very choppy, convictionless fashion. And it closed Thursday below its long-term, 200-day moving average, and just slightly below its short-term, 50-day moving average.

The combination of falling earnings, a tepid forecast, and most importantly, the bearish price action in CAT in recent months, means this is one blue-chip stock traders should sell right now.

I say “traders,” because a strong argument can be made that the pullback in CAT shares this year means a good, low-risk buying opportunity for long-term investors who want to play the overall global growth trend in coming decades.

Action to Take –> Hey, if you are the patient type, then I can see some validity in the theory that CAT is on sale here, especially trading at 12.5 times next year’s earnings. However, if you are a trader, then CAT looks like a sell here. Simply put, there are far too many other winning stocks out there that your money can ride to short- and intermediate-term gains.

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This Blue Chip Appears Headed for Bear Market Territory — Sell Now