By Robert Hauver
Earnings season is on a roll, and traders are playing the old “earnings estimates beats/misses” game, which often has tenuous ties to reality, at best, as analysts go from being over-excited to being overly pessimistic. Here’s just how wrong analysts have been about Caterpillar over the last 4 quarters:
Could it be that CAT is just a special case? Not really – analysts were even more clueless about Boeing. Can you just imagine, (I shudder to think), if you were to submit an estimate to your boss that was off by over -80%, and then followed up that brilliant piece of work with another estimate that was off by over -30%? Do you think it might possibly prompt a reassignment or even a permanent vacation? Not so on Wall St. – where being consistently and often egregiously wrong is OK.
Why is that? Because it supports the trading excitement of “Earnings Beats & Misses”. Just think about it, the market often bases its decisions on the estimates of a group of external people, who don’t have access to the daily, inside info of the stocks they’re supposed to be informing us about. If this sounds like folly, it often is:
Instead of just listening to analysts “pie in the sky” or “gloom and doom” predictions, try looking at what companies actually earned each quarter vs. a year ago:
We can also look at their quarterly Revenue Growth vs. a year ago:
CAT has been one of the best stocks to buy in 2012 and in 2011 for price gains, but Boeing shares haven’t risen nearly as much. Here’s one reason why. BA is forecasting lower 2012 earnings per share, of $4.05 to $4.25, vs. 2011′s $5.33 EPS, whereas CAT is forecasting continued strong growth. Even though BA has a record order backlog, unlike other companies, they can’t rush their highly technical products to market.
BA is forecasting just $4.05 to $4.25, but analysts are estimating $4.46/share 2012 EPS, AND, guess what? Analysts are currently forecasting EPS of $5.67 for BA in 2013, which is 6.4% over BA’s 2011 earnings. Do you believe them?:
How can a value investor take advantage of Analysts’ mistakes? By waiting for the analysts’ next overheated incorrect estimate, which may be so ridiculously high that even a company posting strong gains can’t “beat” it, which is what happened with CAT in 2011, when analysts had somehow not factored in the expenses of CAT’s multi-billion dollar purchase of mining equipment maker Bucyrus.
When the stock gets beaten up, and discounted unnecessarily, make your move, and buy it, OR, do this:
Sell Cash Secured Puts: If you want to give yourself more breathing room, you can sell cash secured put options below the stock’s current price, which will give you a lower break-even price. 2 other important benefits: you’ll get paid now to wait, and you’ll often get paid much more than the next few quarters’ dividends. Fortunately, CAT has rather high options yields which are much higher than its dividend yield.
In these two examples, CAT’s put options pay over 9 to 12+ times the amount of its dividends. The further out in time you sell options, the more premium you’ll get paid, and the lower your break-even price will be. However, your annualized yield will also be lower, because your broker will be holding a cash reserve of 100 times the Put Strike Price in your account against each Put that you sell, until the put expires or is assigned or you buy it back to close out your position.
(You’ll find more info on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.):
How to hedge your gains with Covered Calls: Conversely, if you now own CAT shares, and you’re leery of a market pullback, selling covered call options will protect some of your profit, by giving you additional option income on your shares. The caveat is that, by selling a call option, you’re obligating yourself to sell your shares at whatever strike price you sell the calls at. Typically, the shares will get assigned near or at expiration, if the stock rises above the strike price. So, you’re foregoing potential price gains, in return for immediate option income.
However, these 2 covered call trades each have strike prices above CAT’s current stock price, offering you the potential for an additional $3.80/share in price gains, if your shares get assigned. The longer-term August call options pay more than the May calls, and both call options heavily outstrip the corresponding dividend payouts. (One options contract corresponds to 100 shares of stock.)
(You can see more details for these and over 30 other lucrative option trades in our Covered Calls Table.):
Financials: Although they aren’t high dividend stocks, these two DOW dividend stocks both have attractive Mgt. Ratios, and good interest coverage, but if you’re looking for 2012 growth at a reasonable price, CAT is the more undervalued of the two. In fact, CAT is one of the few DOW 30 stocks to have a low 2012 PEG ratio. However, as CAT has risen almost 29% year-to-date, you may want to wait for a pullback before jumping in.
Disclosure: Author is short CAT put options.
Disclaimer: This article is written for informational purposes only and isn’t intended as investment advice.
Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved