Ari Rokeach
993547023
2-7-11
Stock Reflection Report 3
Caterpillar and Lear
If I were to invest with my own personal money, the first two companies I would
invest in besides Apple, Google and Lululemon would be CAT and LEA. I would
purchase both stocks now when they are both trading at around $100. I would purchase
both on a long term horizon.
Quantitative Analysis
Caterpillar is currently trading at right around $100. The company manufactures
and sells construction and mining equipment, and has a market cap of $64 billion. First
off, CAT pays a dividend of $1.76 (a 1.8% yield), which ranks CAT 2nd out of 56 in the
industry in terms of dividend yield. This dividend is a major benefit when investing over
longer periods of time. Regardless of how the stock performs in a given year, I will
receive a payment for investing in CAT. Next, CAT has a PEG ratio of .82, meaning the
stock could be currently undervalued. I would agree with because I believe CAT will
continue to increase profits as the economy picks up over the next few years and
construction activity picks up again. My belief is mirrored in the company’s revenue and
earnings statistics. Currently, CAT is experiencing quarterly revenue growth of 62.2%,
far greater than the industry average of 12.2%. This high rate out of an economic
depression should not be difficult to sustain over the next few years. Also, CAT has
quarterly earnings growth of 317.2%, and concurrently, an EPS growth rate of 308.1%,
ranking CAT 5th out of 56 in the industry. These figures are an indication of CAT’s
market presence and brand strength. Out of the recession, builders are turning back to
CAT in a record fashion for their supplies. CAT’s ROE of 27.6% ranks it 5th out of 56 in
the industry, an indication that CAT is one of the most profitable companies in the
industry for it’s investors, so continued funding and support should not pose any
problem. All these statistics are an indication of Caterpillars great market presence and
power. I see no reason why CAT should not continue to grow and stock prices continue
to rise over the next few years.
Lear Corp. (LEA) makes and designs car seat systems and components, and has a
market cap of $5.52 billion. Currently trading at $108.72, LEA had a P/E ratio of 3.71,
which is extremely low compared to the industry average of 13.14, and an indication that
the stock is undervalued. A further indication of LEA being undervalued is its PEG ratio,
which is .95. A PEG ratio of .95 is a good indication of an undervalued stock with greater
potential earnings in the future than investors are currently willing to give them credit for.
One astounding statistic is LEA’s ROE, which is 133.11%. This ridiculously high
percentage is a strong indicator of LEA’s profitability ranking it 4th out of 206 in the
industry. Further indication of LEA’s strong earnings is their quarterly earnings growth
rate of 287.40%. And finally, LEA has a very high EPS of 29.34, compared to the
industry average of 1.61, and an EPS growth rate of 450.4%, ranked 15th out of 206 in the
industry. All these high numbers and percentages are an indication of LEA’s market
presence, and its ability to recover from the recession. As proof, LEA more than
quadrupled their profits from 2007, before the recession. In 2007 profits were $241
million, in 2008, negative $690 million, but in 2009 profits were an astonishing $814
billion, a complete reversal from the earlier year. I see no reason for LEA to not continue
to grow in this fashion, and stock prices to rise as a result.
Technical Analysis
Attached are the graphs for CAT and LEA.
CAT’s graphs reflect the strength of its fundamentals. The stock price is above it’s 50 day
MA, which is well above the 200 day MA. There hasn’t been a cross in the lines in years,
as the stock prices has continually risen for the past few years. Technical analysis would
say this stock is a safe bet to buy at any time.
CAT’s point and figure chart also has very strong indications that the stock will
continue to perform well. The stock had a triple top break out on January 27th and has
been rising ever since. Even if price fluctuates this stock should grow over the long run.
LEA’s basic chart also shows strong support for the stock. Since its IPO in early
2010, stock prices have consistently risen from $60 to over $100. While the stock price
could appear to be continuing to rise over the last six months and will continue to do so, I
instead see a pattern of consolidation at the end of the chart during the month of January.
I expect LEA to go into consolidation right now around $100 dollars, despite prices being
above the 50 day MA which is above the 200 day MA.
The point and figure chart for LEA supports this theory because after a double top
break at $91, stock price has since calmed and settled into this 100 – 110 dollar range.
There was just a double bottom break earlier this month, but since then stock prices have
reversed upwards. All this up and down movement is an indication that the stock is
currently in consolidation.
Qualitative Analysis
By every indication CAT is in a position of long term growth. It is the industry
leader of construction/mining equipment suppliers, and seems to be positioned to reap the
benefits of this next economic cycle. As the recession ends and the economy picks up,
construction too will pick up, and as a result, profits will increase for CAT as they are the
major supplier of all construction/mining equipment. CAT has been a main stay in the
Dow Jones Industrial Average. CAT has recently expanded to China and Brasil with new
plants built in each over the last year, and new plants scheduled to be built this year.
Furthermore CAT continues to acquire smaller companies at a very high rate, almost 10
companies in 2010, every continuing its growth. Based on my technical, qualitative, and
quantitative analysis, I would recommend CAT to any investor.
I used the technique of point and figure charting which I learned in seminar for
this report.