A 6% return on Caterpillar in 6 days

I bought Caterpillar (NYSE: CAT) at $131.60 on August 4, 2020. I had visualized my trade in a previous blog post on this stock. I had placed a limit order at $139.97 or just below the $140. The limit got triggered today for a return of 6.3% in six days. My rational was that the stock could face some resistance just about $140 and wanted to exit my position at that level.  

Exhibit: Caterpillar trade set-up between August 4 and August 10, 2020 

 (Source: TradingView)   

What is wrong with 3M?

I am going to break the suspense and answer the question in the title: "There's nothing wrong with 3M!" Its earnings for the quarter that ended June 2020 was exception given the tough circumstances under which every company in the world has been operating this year. Its GAAP EPS was $2.22 for Q2 2020 against an estimate of $1.80. Its revenue of $7.18 billion missed estimates by just $110 million. Complete industries in this era of the pandemic are in a free-fall and here we are punishing an essential, iconic American company for missing revenue by an amount, which would be 1.5% of the $7.18 billion.

Exhibit: 3M Q2 2020 Sales Declined by 13.1%

(Source: SeekingAlpha)

Yes, there was broad weakness in sales across all their business segments. But the company has been aggressive in reducing costs and was able to improve adjusted EBITDA margin by 110 basis points to 26.5%. Their operating cash flow increased 15% year-over-year to $1.9 billion. The management even paid down debt by $1.7 billion since the March 31, 2020 quarter.

The stock has been punished after the earnings. It has dropped from about $163 and trades a little over $151 as of August 4th. 

Exhibit: 3M Technical Indicators are Flashing a Strong Sell on August 4, 2020.

(Source: Tradingview)

Currently, the technical indicators are all flashing a strong sell signal. The market seems to be giving-up on 3M. But the Bollinger Bands are tightening and this raises the possibility of a sharp price move in either direction. Given that the other technical signals are flashing sell, tightening Bollinger Bands could indicate a drop from this level.

Exhibit: 3M Bollinger Bands are Tightening.

(Source: Tradingview)

(Disclosure: I do not own 3M)

 

            

Caterpillar May be a Buy at around $131

Caterpillar (CAT) may be signalling a buy at around $131. This could be short term trade and the exit could be around $140, where the stock could face resistance. Bollinger Bands indicate that the stock is relatively cheap at around $131. There was a 30% upside on reported earnings compared to Wall Street estimates. EPS on Jul 31, 2020 was $0.84 compared to estimate of $0.64.  The earning beat indicate that the stock can go higher in the short-term. 

Exhibit: CAT's SMA is mostly bullish and Bollinger Bands indicate relative low prices.

(Source: Tradingview)

(Disclosure: I own CAT)