Caterpillar Still A Risky Short

Caterpillar Inc.(NYSE:CAT) is trading north of $99 a share after reporting a seemingly impressive earnings report. Sentiment in this stock has been fueled by the meaningful earnings beat in the first quarter plus the improved guidance for fiscal 2017. Nevertheless both numbers are non GAAP but the real number (GAAP earnings) will end up being lower than originally envisioned for 2017. Why aren’t investors taking note of this ?

Well the backlog increase definitely helped but the restructuring charges are going to continue as more¬†manufacturing facilities are going to be closed this year. Why such lofty sentiment levels if more facilities are going to be shut down ? The company’s growth story definitely is taking center stage at the moment but if this growth stalls in coming quarters, I believe investors will be scrutinizing earnings far more closely. Analysts have some lofty earnings projections earmarked for this stock and I still remain in doubt if these numbers can be achieved.

In saying this, Caterpillar could easily end up rising with rising commodity prices and a rising stock market. I would only play Caterpillar on the short side against a long position in a commodity ETF or stock. At present, Caterpillar’s implied volatility is very much on the low end so buying option premium would be favored over selling. I would be waiting for crude to bottom here and maybe buying a diagonal debit spread against this long position to ensure the overall trade had positive delta.

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