Caterpillar (CAT-N)

Have a strong backlog. Wants to see margins improvement. It's had a huge run, but can keep going to finish the year strongly.

Upgraded today. Is fairly valued. The quarter was good, but not exciting. Is a core position of his. The risk is if Russia and Ukraine end the war, this could lower commodity prices, but he doesn't expect this anytime soon.

It reports Tuesday. He expects a good quarter as CAT rides the wave of infrastructure spending and re-shoring.

He bought more CAT. It's a stealthy play in the data centre space where CAT does the heavy construction. This trades at only 17x PE, a 25% discount to John Deere, historically wide. Pays a 2% dividend and has lots of free cash flow.

Owns it for the data centre build, which is seeing huge demand.

They report Wednesday. Benefits from Joe Biden's infrastructure bill and has plenty of projects to build ahead.

The former CEO was good, but no longer running the company. However, shares are not expensive now, -18% this year. That said, it's not the time to buy this (could fall further).

Rough go recently. About 50% of production is domestic to the US. 35% of its business is recurring service revenue, encouraging. Questions around international business. If recession and tariffs are permanent, expect trouble. 

If those clouds dissipate, this could be a good entry point. US administration has changed, but infrastructure renewal needs remain strong. What you could do is buy this, but barbell it with more defensive areas such as telcos, utilities, consumer staples.

Wait until the CEO speaks at the next quarter, given the very uncertain macro environment.

CAT is $165B market cap, 17X earnings, 1.62% yield, 6.96% five year dividend growth, down 4% YTD, debt/cash flow about 3X, forward growth about 10%. DE is $135B, 25X earnings, 1.30% yield, 14.68% dividend growth, 5X debt/cash flow, forward growth 15%. We would consider both HOLDS today. While good companies, they will be vulnerable in a global economic decline, as both have been in prior cycles. Automation/AI will help margins, but this will take some time to show up in the numbers. Mining expansions (CAT) and weak spending (DE) will likely mean less-than-robust growth and/or weak sentiment for a period of time. 
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It reports Thursday, but decide after you hear the conference call so you can learn their future. CAT is no longer cyclical, but a secular grower due to a CEO pushing CAT into consistent end markets.

Higher highs so far, and we're testing the last low. Overall trend is good. He's still buying, has done 2 legs of 2% each so far. Yield is 1.5%.

Note that if the market turns down in a big way this will be one of its victims, as industrials will be one of the first to fall.