On Wednesday, I put in a stop loss of 93.80 on Caterpillar (CAT). The stock has slide considerably over the past few weeks. The stock has dropped over 8% since the start of February. The sell off was exacerbated on Wednesday when the company announced that machinery sales had declined recently. I decided to put in the stop loss in the morning when the stock was at 94.50 and I wasn’t expecting the stop loss to be triggered. However, the sell off continued during the day and Wednesday ended up being one of the worst one day drops in the Dow in 2013. Despite my sell, I still believe that Caterpillar is a fantastic company. 2013 won’t be such a great year for Caterpillar, but the company has major potential over the long term. I purchased the stock last October and I walked away with a 12% gain. I’m looking to reenter into the stock when it reached the low 80s.
I opened a long position in the iShares Turkey ETF (TUR) this morning. The ETF looks attractive at these levels. TUR has corrected about 10% so far in 2013 after its fantastic run up in 2012. The country has one of the highest projected real GDP growth rates in the world. There are many catalysts that will propel this stock to new heights in 2013. The country will have its debt to the IMF payed off by the May of this year. Istanbul is currently bidding to host the 2020 summer olympics and the ETF will likely benefit if they are selected as the winner this September. The odds are in Turkey’s favor because of numerous infrastructure projects that the country has completed lately. Real estate in Turkey is also currently booming. Many Western Europeans now retire in this country. This emerging market has potential and numerous events will propel the country forward.
This morning Ron Baron, CEO of Baron Capital, was on CNBC and said that the Dow Jones Industrial Average will reach the 30,000 mark in just 10 years. The Dow recently touched 14,000 and many investors feel as though that they missed out. Ron Baron believes that the short term moves don’t matter and the market will steadily grow over the long term. His theory may sound absurd to many investors, but I believe that his prediction will happen. Over the long term he believes that the market will grow at a rate of 7%. Historically speaking, 7% is a very feasible target for growth. His fund holds stocks for an average of 7 years. He goes on to say that the Dow will reach 50,000 in just 20 years. This prediction is bold, yet it does seem plausible. The stock market only need to grow in the single digits for this prediction to become a reality.
National Oilwell Varco (NOV) reported earnings on Friday that beat expectations. Despite the outstanding earnings report, shares are down more than 4% Friday. The company has a virtual monopoly on rig technology and they are in a good position for growth because of their dominance. Jim Cramer said the following about National Oilwell Varco on the lightning round segment of his show last week. “People think it will have a bad quarter next week. If that happens, buy, buy, buy. They have the best rig technology.” Since the stock reported a great quarter and is down, now is the perfect time to buy, buy, buy.
National Oilwell Varco CEO Merrill Miller announced in the Q4 2012 conference call that they earned record revenues and profits last year. The EPS (excluding transaction costs) for Q4 came in at $1.49, which is a 9% increase from a year ago. Quarterly revenue was also impressive and it jumped 33.5% from 4,259.0 million to 5,685.0 million. Revenue has drastically increased since the financial crisis as shown in the graph below. The company’s EPS in 2012 increased 24% from 2011. In addition to these impressive figures, the company announced new capital equipment orders of 2.42 billion, which is a 1:1 book to bill ratio. National Oilwell Varco acquired numerous new companies in 2012. In total the company spent 2.9 billion on 17 transactions and they expect to close the acquisition of Robbins & Meyers in just a few weeks.
Despite the phenomenal growth National Oilwell Varco has experienced over the past few years, some believe that the company’s growth prospects for the future aren’t that bright. The company did announce in their Q4 conference call that demand for the rigs in the North American land market is very weak. Clay Williams, COO of the company, said that the North American land market has been sliding since in the summer of 2012 and the conditions continue to persist. However, National Oilwell Varco’s growth story is not over despite weak demand from the North American land market. The company believes that international land markets are far more promising. Also, many international markets are retooling much like their North American counterparts did several years ago to more high tech drilling assets.
Demand for offshore rigs and equipment is strong, despite weak demand from the North American market. Many Wall Street analysts believe that orders for deepwater rigs are slowing, but Varco claims that this is not the case. The company states that after-tax returns for new rig construction projects are in the high teens. Also, the risk of cost of overruns and late deliveries for Varco is now near zero. The company also said in their conference call that 2012 saw a record number of deepwater field discoveries. The company asserts that high oil prices will continue to lure cause companies to pursue new deepwater drilling projects and it will need Varco’s rigs if they are to accomplish this.
It is now the perfect time to buy National Oilwell Varco because of Friday’s dip and the company’s phenomenal Q4 2012 performance. 2012 was a record year for the company and it is in a good position to perform well in 2013. Numerous well known investors such as T. Boone Pickens and Warren Buffet are bullish about the company’s future prospects. Pickens believes that the company is in a good position to benefit from higher natural gas prices. The major downside to this stock is the lack of growth in the North American land market. However, the company is still growing in every other part of the world, which will help to offset the weak growth in the North American land market. The stock’s P/E ratio is lower than the industry average of 18 and the forward P/E ratio is less than the TTM P/E ratio. Also, the stock has a PEG ratio of .8 could indicate that the stock is undervalued. The stock has great growth prospects and it was unnecessarily sold off Friday.
Sources: the information and data in this article came from the company’s Q4 2012 conference call and Yahoo! Finance
Source: chart from Y Charts
Many companies have reported outstanding Q4 earnings recently and there are still numerous companies that still haven’t reported. Companies such as Proctor and Gamble (PG) and Starbucks (SBUX) reported great earnings and their stocks have rallied since then. Caterpillar (CAT) is a stock that you should own in 2013 because of their recent earnings report. Investors should definitely take a look at this company even though their Q4 earnings report was somewhat mixed. 2012 was a record year for Caterpillar, but the company gave a wide guidance for 2013 and the company is dealing with a Chinese accounting scandal. Despite these factors, Caterpillar is up 16% over the past few months and the stock has the potential to continue rallying.
On January 18, Caterpillar announced a 580 million dollar impairment charge that was related to the company’s acquisition of Siwei. Caterpillar acquired Siwei in June 2012 and Siwei should allow Caterpillar to gain exposure to the Chinese underground coal industry. The acquisition of Siwei is definitely the most damaging news that Caterpillar reported during their conference call on Monday. However, the news really isn’t that bad. Caterpillar reacted swiftly to the accounting misconduct at Siwei and they changed the leadership at Siwei. Despite the accounting misconduct, Caterpillar’s profits were still up 15% in 2012. The Siwei scandal was the worst news that Caterpillar reported on Monday, yet the company took action on this issue and expectations were still beat.
The company announced earnings of $1.91 a share on Monday, excluding a write down on the Siwei investment, versus expectations of $1.70 a share. Sales came in at $16.08 billion versus expectations of $16.06 billion. Sales and revenues increased 10% from 2011. Caterpillar gave guidance for 2013 earnings of 7-9 dollars a share versus Wall Street expectations of $8.54 per share in 2013. Caterpillar gave such a wide guidance for 2013 because of Europe and the debt ceiling. They expect global growth to pick up in the second half of 2013. Caterpillar believes that growth will increase its infrastructure growth over the next few years.
The stock has solid fundamentals. As stated before, revenue increased for the company in 2012 and the company’s TTM revenue is one of the highest in it’s sector. The company’s revenue growth since the financial crisis can be seen in the graph below. The P/E ratio is currently at 10.09, which is below the sector average. Caterpillar’s debt has increased significantly since the financial crisis, but that is because Caterpillar has purchased new assets such as Siwei that will help the company grow. The P/S ratio and the PEG ratio are both below 1, which could indicate that the stock is undervalued. The company’s free cash flow is also positive. The stock’s yield of 2.2% is somewhat low, but it is still higher than the yield of some investments. Caterpillar also has healthy margins.
Numerous factors will help to propel the stock back to its 52 week highs that were seen early last year. The housing recovery, Chinese growth, and revenue increases will move the stock to higher levels in 2013. The company believes that macroeconomic growth will accelerate in the second half of the year and beyond, which will help Caterpillar’s business. I also believe that the company is undervalued at the moment because several key value investing metrics indicate it.
I really enjoyed reading the following articles this week. I hope that you will like them too!
1. John @ Frugal Rules shows how we can become better investor by using reason in his article titled “How to Take the Emotion Out of Investing.” Investing based on emotion rather than reason is serious issue that many of us need to handle.
2. JC @ Passive Income Pursuit describes his sell of a put option on Coca-Cola (KO) in his post titled “Recent Transaction.” Thanks for sharing your recent trade!
3. Grayson @ Debt Roundup describes overspending in America. His article titled “Overspending in America – The Sad Truth” has an info graphic that illustrates the problem.
4. Scott @ One Smart Dollar describes the effects of being in debt in his article titled “The Psychological Effects of Being in Debt.” The article states that being in debt is one feelings that a person can feel.
5. Chris @ Stumble Foward shows us how to use an easy to calculate ratio known as the debt to income ratio in his article called “How to Control Your Debt to Income Ratio – A Guide For Beginners.” The ratio is easy to calculate and it is an indicator of your overall financial health.
6. My Own Advisor describes how to rid yourself of debt in his article titled “3 Golden Rules to Rid Yourself of Debt.”
Pacific Drilling (PACD) is a company that only focuses only on ultra-deepwater drilling. The company was founded in 2006 and they initiated the construction of four drillships in 2008. They operate in Brazil, Nigeria, and the Gulf of Mexico. Pacific Drilling has one of the most technologically advanced drillship fleets in the world. The stock can be seen as speculative due to its focus on the ultra-deepwater drilling market. Ultra-deepwater drilling is still technologically challenging and it is a relatively new form of drilling.
Pacific Drilling operates an outstanding fleet. The Pacific Bora averaged about 97.8% revenue efficiency during the third quarter of 2012. Another ship, The Pacific Scirocco, achieved an exceptional average revenue efficiency of 99.5%. The company reached its revenue efficiency targets during the third quarter. The company is continuing to expand its fleet of rigs. A new rig was launched in July 2012 and two new rigs are currently under construction. The current price of crude lately has allowed Pacific Drilling to deliver its clients’ target return levels for ultra-deepwater projects. Demand for deepwater drilling is continuing to increase despite disasters such as the BP oil spill. The demand for ultra deep water drilling rigs is currently greater than supply of rigs.
Despite the rapid increase in demand, the fundamentals are somewhat mediocre. This is why I believe that stock is very speculative. The stock’s high P/E ratio reflects its speculative nature. The debt to equity at .81 does seem to be higher than the sector average, although some debt should be expected due to the company’s age. Another downside to the stock is the dividend yield, which is currently nonexistent. The company’s revenues are the bright spot and the graph below shows the rapid increase of revenue.
Pacific Drilling has enormous potential to due the nature of its business. Ultra-deepwater drilling is currently booming and demand for Pacific Drilling’s rigs will continue to explode in the near future. However, the stock’s high P/E ratio makes it a speculative investment.
The CBOE Volatility Index (VIX) is at its lowest level since 2007 and it is poised to break into the single digits. The VIX ended at 12.46 on Wednesday and the record low was set in early 2007 at 9.89. The VIX index is widely used a way to measure the level of fear in the market. Many investors are currently bullish about the future of the market in 2013 and the VIX index currently represents those views. However, investors should be concerned about the new lows in the CBOE Volatility Index. Retail investors are always late to the party and they have returned in mass lately. The last time that VIX index was this low was during the days preceding the financial crisis. While this doesn’t mean that we will see a new financial crisis in the near future, it isn’t good sign. The only place that the market volatility index has left to go is up. Also, the debt ceiling has yet to be fully resolved and a new partisan conflict could cause a spike in the VIX index. Investors can profit from a future spike in the VIX with call options.