Should I Buy Caterpillar stock (CAT)? Finance YouTuber Analysis

The YouTuber advises caution on Caterpillar, noting that it is one of the names that has already seen significant price appreciation (up 60%) and is being shorted by Michael Burry. The implication is that the 'easy money has already been made' and there is increased risk due to its crowded popularity.

“The company Michael Burry is shorting is Caterpillar. One of the names that has already run up the most. And whether he turns out to be right or not, well, that's pretty much the risk that's baked into all of those crowded winners.”

The YouTuber mentions Michael Burry's reported bet against Caterpillar, classifying it as one of the 'hottest names' that are currently overvalued. The implication is that the stock's price is inflated by market sentiment rather than its intrinsic value, making it a risky investment at current levels.

“According to reports, Burry has been betting against the hottest names, things like Nvidia, Applied Materials, Caterpillar...”

The YouTuber suggests avoiding Caterpillar, noting its shares are up 280% in 5 years and its P/E is 41 (32 forward). While current operations benefit from tailwinds like mining and AI construction, he argues that the multiple has expanded significantly. He warns that these stable companies are now trading at high valuations, increasing the risk of multiple compression and significant drops if investors shift away from 'safe' assets.

“Price earnings multiple is now 41. price on a forward basis, it's 32. Again, you're having a ton of spending on capital expenditures from mining companies. Some of their equipment is involved in this construction for AI buildouts. Lots of tailwinds behind Caterpillar today.”

The YouTuber identifies Caterpillar as a 'next big play' with potential for a parabolic move, comparing it to Tesla's past performance. He points to a technical setup on the 30-minute chart, specifically an inverse head and shoulders pattern, with an entry point at $392 and a stop loss at $390, targeting $420.

“392 is your entry that's what E stand for for E equals entry okay right below 392 at 390 equals stop loss let me show you how to hit this home run okay so it's either going to go our way or it ain't the next entry is right here sitting right at 3 96 okay that's your other entry but that's sitting at resistance right now so we got to get above 396 cuz that's going to open the door for 400 okay and then we going to go blow this top off up here there going to be that Tesla style play to 420 but in options it's going to be a 100000% play okay.”

The analyst calculates Caterpillar's fair value at $238 per share, making it currently overvalued at $332. Beyond valuation, a significant concern is the potential for Cat Financial, a subsidiary, to become too large and problematic, similar to GE Financial's issues during the financial crisis, despite no current evidence of malfeasance. This potential risk, combined with the current overvaluation, leads to an avoid recommendation.

“for me on a personal basis I'm going to not going to add cat Financial I mean cat not cat Financial cater biller to my Investment Portfolio I'm not even going to add this one to my Bullpen because I think that there are too many good opportunities out there”

The analyst recommends Caterpillar for its upside potential over the next few years, driven by its exposure to the $1.2 trillion infrastructure bill. He expects 12% earnings growth this year, making the stock relatively cheap at 14 times P/E. Despite a lower dividend yield of 2%, Caterpillar has a strong history of dividend growth (9% annually over five years) and a low payout ratio, suggesting future increases.

“I like the upside on the stock over the next few years. Cat is the world's largest manufacturer of construction and mining equipment with the strongest dealer Network.”

The analyst recommends Caterpillar due to its strong exposure to the upcoming $1.2 trillion infrastructure bill, which is expected to drive significant sales growth in construction and road building from late 2023 into 2024-2025. He notes that states are well-funded to support these projects, providing a tailwind for CAT's dominant position in these segments.

“I think caterpillar is going to see very strong sales growth over the next couple years that's going to help support the stock quite a bit.”

The analyst advises against buying Caterpillar stock due to its low projected annual return of 3% over the next decade, which significantly underperforms the S&P 500's historical average. He highlights concerns about flat or declining revenue and EBITDA growth, high debt levels (above 3x debt-to-EBITDA), and the stock being overvalued at its current price of $210 compared to his fair value estimate of $176.

“needless to say i think that is definitely definitely below market it's too much of a risk for us to go after something like this and expect them to turn the business around and materially change the growth forecast”