By
Perhaps I should have said poor Caterpillar stockholders. We are the ones that have seen our shares slide steadily from a high near $66 just under a year ago, to today's level that is barely half that. What's going on here?
CAT seems to be the last U.S. company still suffering from the Asian meltdown of 1998. While most of the economic world has recovered or is at least recovering, CAT's sales have been low overseas and have stayed low for over a year. That's not hard to understand. If major construction projects were canceled or delayed due to the Asian monetary crisis, it makes sense that there would be a lag before they picked up speed again.
The real problem, however, hasn't been low sales, but the way that slightly lower sales have translated to a much lower bottom line. Take a look at our financial reports for Caterpillar. Revenues for 1999 were down 6% compared to 1998, but EPS was down 45%. It's an old story: Price follows earnings. As long as a company has earnings, anyway. One can't help but grouse a bit about a company that makes almost a billion dollars in profits each year getting cut in half when profits drop a bit while Internet startups soar into the stratosphere on the merest possibility of earning that much, if all goes well, several decades from now.
One of the classic tests of whether or not one should sell a stock is to ask yourself if you would buy it at the current price. If a stock you think has great potential falls, and that potential is still there, then it is simply a better deal now than it was when you bought it. Instead of selling that underperformer, you should be buying more, goes one school of thought. Conversely, if a stock has appreciated to the point where it seems overpriced relative to it's potential earnings growth, maybe now is the time to consider selling it.
I don't know that this formula is foolproof, but it does reflect a very sensible way to make buy/sell decisions. The RP formula that we use to select Foolish Four stocks mechanizes this process. The dividend is a simple proxy for the company's potential return. (The logic is that a company in trouble, but not such big trouble that it can't
maintain its dividend, has a good chance of pulling through.) The RP compares price and dividend. It goes up when a stock's price goes down relative to its dividend, and down when prices rise relative to the dividend.
Sometimes, of course, a company becomes a better and better bargain as the price drops, which is rather hard to take if you bought it when it first became a bargain. But Foolish Four investing is all about patience.
I confess, I'm not the most patient of investors. My rational self has to keep lecturing my emotional self about the value of a long-term approach. It helps that I have some growth stocks to balance my Foolish Four. Of course, if all I had were growth stocks, I would be REALLY nervous.
Right now patience is getting a workout. But the following comment from the front lines helped. Ray Brown of Vancouver, Washington attended the Oregon Logging Conference and reported:
"This is the largest logging equipment show in the nation, and Cat was on display everywhere. I work for the competition (www.cummins.com), but my guys are not part of the FF, so I own CAT stock. Anyway, there were lots and lots of heavy duty loggers sporting tattered Levi's held up by yellow CAT suspenders (That's the uniform of choice in the woods out here, sort of like a three-piece Armani pin stripe and wing tips in that other wilderness. Even those guys wear suspenders, so they are really not all that different from our guys). And a good number of the trucks/skidders/logloaders/shovels/etc. in the exhibit had CAT diesel power, or were all CAT. (We had our share as well, so don't worry.) Anyway, keep the faith, and we will be OK. Cat is not going away anytime soon, and you can't build roads with VirtualMachine.com. You need smoke and fire breathing machinery to do that."
Fellow Foolish Four stock JP Morgan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JPM)") else Response.Write("(NYSE: JPM)") end if %> seems to have come to the same conclusion. It just raised CAT to a "buy" rating.
There's a lot of earth left to be moved. Somebody's got to do it.
Fool on and prosper!