Caterpillar May be Set to Weaken Further.

Caterpillar recently announced that it may face a prolonged sales decline. The stock lost considerable ground on the day of this news. Looking at the Caterpillar's chart, it seems like weakness is set to continue. Caterpillar's sales have declined by 30% in Q2 2020. That's a very substantial decline. Given that the company sells very high-priced capital equipment that last a long time, demand for this equipment may recover slowly.

Exhibit: Caterpillar's Sales Were Down 30% Compared To Q2 2019.

(Source: SeekingAlpha)

I have also done a trend analysis on TradingView that seem to indicate further weakness to come in the stock.  

Exhibit: Caterpillar's chart is reflecting its weak fundamental. 

(Source: Author's chart on TradingView)  

Morningstar's analyst report on July 31 2020 makes a couple of interesting points:

• Many end markets served by the company are not directly affected. 
  
• Given the rally in gold, that may spur more mining.
  

All this may not be enough to save the company from a prolonged downturn. 

Surprise! Bank of America's US 1 List Includes L Brands

The Bank of America's US 1 list is a collection of best investment ideas from the list of buy-rated, US-listed stocks. It came as a surprise to me that L Brands is included in the US 1 list for Q3, 2020.
Victoria's Secret, which is a division of L Brands, has been in trouble for a very long time. Sales at this division have been declining for years. For example, in the fiscal year 2019, Victoria's Secret reported sales of $5.1 billion. This was down from $5.6 billion in the fiscal year 2018. That's a change of about -9% from 2018.

Exhibit: L Brands Net Sales in Fiscal Years 2018 and 2019

 

(Source: SEC.gov) 

A similar decline in sales was seen between 2017 and 2018. In 2018, sales declined by 4% compared to 2017.

Exhibit: L Brands Net Sales in Fiscal Years 2017 and 2018

(Source: SEC.gov)

As a result of this decline in sales over multiple years, L Brands had struck a deal with a private equity firm - Sycamore Partners - to take Victoria's Secret private. But, due to the COVID-19 pandemic, Sycamore Partners backed-off from the deal. So, given all those problems with the Victoria's Secret brand, why is Bank of America including L Brands in its influential US 1 list? 

L Brands' inclusion may have more to do with the other division called Bath & Body Works.  

Overall sales did take a huge hit to the downside during the pandemic-driven closure of its stores. But, Bath & Body Works saw an increase of 85% in its direct-to-consumer business. This business recorded $288.9 million in sales in Q1 2020 compared to $156.4 million in Q1 2019. 

Bank of America sees the stock as undervalued given that it may be expecting this outperformance to continue for the Bath & Body Works division and that is why this was a surprise addition to the US 1 list.     

Disclosure: At the time of this publication, I do not own L Brands.