Capitol Spending

With tax reform in the rear window as a near-term stock market catalyst, many eyes are turning to infrastructure spending as a future driver for share prices—especially for those companies that will supply the materials, machinery, and expertise required to upgrade the nation’s highways, bridges, railways, and airports. In other words, it’s a scenario that would likely feature a very busy Caterpillar (CAT).

The White House put infrastructure back in the spotlight yesterday by announcing its $200 billion federal spending plan, which it says is designed to spur roughly $1.5 trillion in infrastructure investment with state, local, and private partners over a 10-year period.1 Congressional Democrats have floated an even larger federal spending package—$1 trillion.

Not that Caterpillar has needed a government spending program to rescue it from lackluster performance. CAT shares rallied 70% in 2017, a gain that expanded to 87% by the time the stock hit its all-time intraday high of $173.24 on January 16. And even after the recent sell-off, the stock is still up around 170% from its 2016 low.

Caterpillar (CAT), 11/9/15 – 2/12/18

Source: OptionsHouse

In what could be considered a bit of bad timing, though, Caterpillar released its very robust Q4 earnings—exceeding revenue estimates by nearly a billion dollars and beating earnings by 21%—on January 25, one day before the broad market peaked and then entered its current correction.

Just as the stock had outpaced the market to the upside over the past year, CAT also gave back more on the recent downturn—17.5% from its January 25 high of $173.10 to its February 5 low of $142.85, compared to the S&P 500’s (SPX) 11.8% peak-to-trough decline from January 26 to February 9.

However, as of yesterday, CAT had not dropped below its February 5 low, while many stocks (and the S&P itself) traded to lower lows on February 9. The stock also outperformed the broader market during yesterday’s rebound: halfway through the session the stock was up nearly 2% while the S&P was up around 1.4%.

Caterpillar (CAT), 12/4/17 – 2/12/18

Source: OptionsHouse

The infrastructure debate—never mind the spending itself—isn’t going to wrap up tomorrow. Democrats are likely to dig in their heels for a larger plan, while some Republicans who have campaigned on smaller government and fiscal belt-tightening may be leery of supporting a large federal spending bill.2

No stock is likely to be immune to continued volatility in the event the wider market continues probing lower, but after its correction some traders likely believe CAT could be well-positioned for a short-term rebound, not to mention longer-term strength if a healthy infrastructure bill becomes a reality.


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1 Reuters. Republicans, Democrats fight over infrastructure plans. 2/8/18.

2 Trump Unveils Long-Promised Plan for Upgrading U.S. Infrastructure. 2/12/18.