Since the market meltdown ended last spring, Caterpillar (CAT) has been on an impressive upward trajectory. There have been 58 weeks of trading since the March ’20 low and in that time period, Caterpillar has only moved lower in 14 weeks. There was a three-week losing streak last April and there have been two two-week losing streaks over the last 58 weeks. That is a pretty impressive stretch.

With the stock moving up so consistently, it’s not very surprising that a trend channel has formed since the low last spring. We see how the channel has helped define the trajectory of the rally with the lows over the past year connecting very neatly to form the lower rail of the channel. The upper rail isn’t as clean, but you get the idea of how it helps define the cycles.

The overbought/oversold indicators are interesting in that they have been in overbought territory for such long stretches. The stochastic indicators have been in overbought territory since last July. The 10-week RSI has been in overbought territory for most of the past six months and it has been above 60 since last August.

As for the daily technical indicators, the Tickeron Technical Analysis screener shows that Caterpillar has received bullish signals from its Momentum indicator and from its Bollinger Bands within the past week. It also received a bullish signal from the AROON indicator approximately three weeks ago.

Earnings and Sales Have Slumped in Recent Years

One of the surprising things I found when I started analyzing Caterpillar was the fact that earnings and revenue have been declining. The company has seen earnings decline by an average of 7% per year over the last three years while sales have slumped by 3% per year over the same time period. Earnings declined by 22% in the most recent quarterly report and sales were down 15%.

The rally over the last year seems to be based more on the outlook for earnings and sales rather than the past results. Analysts expect earnings to jump by 21.3% for the first quarter while sales are expected to jump by 4.3%. For 2021 as a whole, earnings are expected to jump 27.1% while sales are expected to increase 13.6%.

The profitability measurements for Caterpillar are one saving grace. The return on equity is 21.8% and the profit margin is 10.6%. This helps the company get an SMR rating in the average range—despite the sales declines in recent years.

The Tickeron Fundamental Analysis screener shows the SMR rating and it shows four areas where the company scores well above average. Heading in to the first-quarter earnings report, Caterpillar gets high marks in its Valuation rating, Profit vs. Risk rating, Price Growth rating, and P/E Growth rating. The only area where the company gets a negative mark is in the Outlook rating.

Looking specifically at the valuation metrics, the trailing P/E is a little high at 42.1, but the forward P/E is only 27.8. One indicator that is really good is the forward PEG ratio which is at 1.5.

The Profit vs. Risk rating takes a look at the stock’s price performance versus the volatility and the drawdowns. With the stock moving so consistently toward the upside in the past 13 months, the volatility is low and the drawdowns have been minimal.

Analysts are Skeptical toward Caterpillar

Turning our attention to the sentiment indicators for Caterpillar we see that analysts are pretty skeptical toward the stock. There are 25 analysts following the stock at this time with 10 “buy” ratings, 12 “hold” ratings, and three “sell” ratings. This gives us a buy percentage of only 40%. The average stock’s buy percentage falls in the 65% to 75%. When you consider the improving fundamentals and the upward trajectory of the stock, seeing such a low buy percentage is surprising.

The short-interest ratio for Caterpillar shows a different stance from investors. The current reading is 2.0 and that is lower than the average stock. Of course with the stock rising the way it has over the last 13 months, it would be hard to hold on to a short position and it would be tough to justify a new short position. The average short interest ratio falls in the 3.0 range, so Caterpillar’s is below average and that reflects above-average bullish sentiment.

The overall long-term outlook for Caterpillar looks pretty good. After seeing earnings and revenue decline for several years, the company looks to be set for another growth period. The infrastructure plans for the U.S. should help the company boost sales.

Sentiment isn’t overly optimistic and from a contrarian viewpoint, that is a good thing. If Caterpillar delivers results anywhere close to expectations, we could see some of those skeptical analysts issue upgrades and that could help boost the stock price.

The most impressive thing about Caterpillar, at least to me, is the consistent move higher in the stock price. The relentless push higher has been incredible impressive. I could see the stock potentially dipping a little after the earnings report, but I think a drop down to the lower rail would be a buying opportunity.

Expectations seem to be building ahead of the earnings report and that could mean the hurdle for Q1 earnings is pretty high. When I say the expectations are high, I’m not talking about the EPS estimates, I’m talking about investor expectations. When investor expectations are high, it is difficult for companies to issue strong enough numbers to impress all investors and we tend to see a move lower on the disappointment. I can see that happening with Caterpillar, but the move lower would be a short-term pullback in my opinion.