Despite not having anything to do with e-commerce, Caterpillar (NYSE:CAT) stock enjoyed a huge pandemic boost due to its indirect exposure to the booming housing and commodity markets. The share price rose 182% from its March, 2020 low of $87.50 to as high as $246.69 by June, 2021. With dividends included the total return was even better. Not bad for an old-economy construction and mining equipment manufacturer.
Alas, no trend lasts forever. Caterpillar stock fell to $167.08 earlier this month, down 32% in just over a year. A quick look at the big picture, however, tells us that CAT has always been able to recover from past bear markets. The company’s leading market position, strong balance sheet and cash-generating abilities make it a good buy on dips. The only question is, is the recent one a buying opportunity or the start of an even bigger crash?
The 4-hour chart above puts Caterpillar ‘s latest bear market under the Elliott Wave microscope. The stock price appears to have drawn a complete W-X-Y double zigzag correction. Waves W and Y are simple a-b-c zigzags. The interesting part is that wave X looks like a rare expanding triangle pattern.
Caterpillar Stock Likely to Recover From Yet Another Big Pullback
Just as the more common contracting triangle, it consists of five sideways-moving waves labeled a-b-c-d-e. And just as the contracting variety, it precedes the final wave of the sequence. Here, the final wave is Y. The only difference is that in an expanding triangle, each wave is bigger than the previous one, giving the pattern its shape.
If this count is correct, the bear market in Caterpillar stock might be over already. According to the theory, once a correction is over, the preceding trend resumes. Here, the trend prior to this 32% drop was clearly pointing north. So, it makes sense to expect more upside going forward. Long-term targets lie above the previous all-time high, putting $250 and maybe even $300 a share within the bulls’ reach.
However, investors willing to bet on Caterpillar must be aware that this is hardly a growth company. Sales have been more or less stagnant in recent years. Therefore, they will be relying merely on an earnings multiple expansion, rather than actual business growth.