Shareholders of Caterpillar (NYSE: CAT) had a very rough Friday. The company reported record-setting profits and sales and forecasted higher sales #'s and higher profit #'s for 2007.
Well, officially, they said 2007 sales and profit would grow in the range of 0%-5% and 0%-10% respectively. All sounds good, right? Well, on the day of this seemingly positive announcement, Caterpillar's stock fell nearly 15%. This decline is in addition to the 15% the stock was already down (pre-earnings announcement) since May, 2006, it's all time high. Basically, the stock is down 28% in the last 5-6 months.
The culprit? The company also reported that some segments of their business, like the U.S. housing market, was going to suffer another decline in 2007. The company also said that global growth would slow - not decline, but slow down. However, the company also said that many other segments of their business were going to continue to experience strong growth in many other aspects of their business, so what's the problem?
This one event sent shockwaves through the stock market on Friday. The Dow Jones was down 9 points and many estimate that Caterpillar's drop probably took 50-70 points off of the Dow. Basically, if it was not for CAT, the Dow would have been up another 50 points or so to another all time high.
CAT's decline also impacted just about every other stock in its industry. For instance, one of my holdings, Astec Industires (NASDAQ: ASTE) which is still up 6% since I mentioned it September 5, 2006 (despite being down 7% on Friday) had a rough day. For ASTE, this is probably a good thing. ASTE's stock cranked up to $28.50 on strong volume on Thursday before getting whacked on Friday thanks to CAT's earnings and partially to the October 2006 options expiring which always adds some volatility to the stock price.
Here are the realities:
1. Gap Filled
The stock closed the gap down that occurred in late July from $27.50 to $24.50. If you look at a 1 year chart, you will see the gaping whole in the stock price. The stock market is nothing but inventory management of the shares out there - more often than not, these gaps get filled somewhere along the line to restore balance. This has just recently happened and the upward pressure in the inventory to get back to close the gap was possibly responsible for the big upswing on Thursday morning. It's kind of like the stock getting ahead of itself. Controlled movements up are more solid than big explosions, though the latter are very exciting.
2. Support Held
From a technical standpoint, the stock held it's support line at $26.02. Of course, only time will tell, but long term, the current marketplace indicates things still bode well for ASTE.
3. Buffer for Earnings Announcement
As strange as it sounds, I actually welcomed this correction. I do have some nervousness about ASTE's earnings report on Monday morning. If the ASTE stock was flying high above $28 and maybe even breaking $30 going into Monday, well, if the earnings announcement was anything less than spectacular, we would have seen a very strong correction downard. Even worse, if the earnings report were negative, it would have been even worse. Additionally, even if the earnings were strong, it probably would not have had a huge upward effect on the price as that event may already have been priced in. Come Monday, regardless of earnings announcement, we likely would have seen a correction upward. The market always overreacts in the short term - either too high or too low. The steep decline on Friday will likely return some of the gains it took away come next week. Plus, in the event of a bad earnings news, CAT's announcement already laid the groundwork for that possibility and subsequently priced it into ASTE's stock price.
All in all, the fundamentals have not changed; I am not further acting on ASTE until I see the earnings announcement come Monday morning. If anything, I will add to my position, but I may just hold with what I have.
As for Caterpillar, down 15% in one day...and 30% in 5 months...it could very well be a buy for the long-term. When a stock has historically delivered 10%+ annual returns and then in a short period of time like 5 months or even 1 days...gives back 1-3 years of hard earned gains, it might make sense to dive in.
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