This week, tariffs are getting all the airtime creating a degree of nervousness in the market. Equities have fallen, Trump has become aggressive with trading partners, and there are rising concerns that this approach will hurt growth and stoke inflation, a negative influence on equities. However, it’s important not to lose sight of the bigger picture. The US needs to address its balance sheet, and while levies and aggressive cuts to the bureaucracy are a start, it’s the pro-growth policies that will be most important. In China, growth is in focus over the next 48 hours as they define their targets, and (sort of) tell us how they’ll achieve it. Underpinning growth is key to both. Growth requires development, and infrastructure is central to it across major economies.
- Into market weakness, quality stocks trade back to better valuations. As George Soros says, as investors, we shouldn’t be focussing on where the puck is now, where it’s going is the most important thing. In other words, continue to think 6-12 months ahead.
Caterpillar is a well-known global brand manufacturing machinery used in construction, mining, energy & transport. The stock has fallen from above $US400, testing $US320 overnight, a ~20% pullback. It now trades on a mildly inexpensive PE of 15.8x relative to its own history, which is around 10 PE points below the markets average.
Caterpillar reported better-than-expected quarterly earnings at the end of January but the shares have fallen since, with the growth outlook squarely to blame. For 2025, they guided to full-year sales slightly lower than in 2024. That was roughly in line with expectations at the time; however, with broader market weakness and a lack of future growth, it’s understandable why the market has sold the stock down from a mildly elevated valuation to a mildly cheap valuation, as shown on the chart above.
The market is not pricing in much growth for CAT over the coming 1-2 years, and that sets up an interesting position. If the sell-off intensifies across global equities, buying CAT another 10% lower on 13-14x earnings makes sense to MM given the macro backdrop 6-12 months out, where lower interest rates and pro-growth policies across the world’s two largest economies support demand for Caterpillar’s high-quality equipment.
