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Saturday, May 2, 2009

Derby Trade: Whos Bringing Home the Gold?

With the 135th Kentucky Derby on the way, many of us may be wondering how we can make some money on the race. However I am not a gambler (because I am a numbers person), and I know the odds... Therefore I am betting on something different... GOLD. With the stimulus package underway and another $1 trillion of borrowed money being added to our debt, gold is sure to sky rocket. Keep in mind gold trades in US dollars so if our dollar gets stronger it should help prevent it from climbing too fast. Overall gold should rise with how much money is being printed. One instrument to look at may be the GLD which mimics the movement of gold bullion, a possible way to make some money if gold sky rockets, like many predict. I like to think outside the box, so I chose a different way to make money off my expected gold spike. I did not do this by playing a gold mining company, but in fact a mining equipment maker... Caterpillar. I think CAT is a long term gem or in this case "goldie". CAT reported their first quarterly loss in 16 years; so this is a great time to take advantage of their low stock price. Given the economy and that type of business, it is expected. Recessions don't (and this one certainly won't) last forever. The recent GDP number stated exports were higher, with the CAT CEO stating that demand for excavators was at record numbers, thanks to China. This certainly sends a bullish signal for CAT. CAT has maintained their dividend at 42 cents a share, which at these levels comes to almost 5% a share annually. The chart below shows CAT over a year. If you think the market has bottomed, this chart may signal a clear bottom with the market near March 6, 2009.
Cat is a leading equipment maker for the mining industry, therefore my theory is: if the price of Gold spikes (with the amount of money being printed), gold will become more attractive and profitable to mine, therefore CAT equipment will be in higher demand. Some analysts have expected gold to hit $1500 an ounce by year end 2009, if this is the case demand for mining equipment is sure to rise. Check out some of CAT's mining equipment and their mining magazine in print for more details. In the last conference call CAT announced they were not looking to cut their dividend but to keep it steady (if not increase it). CAT was also recently upgraded by JP Morgan, even after a dismal earnings report. Signs on CAT are certainly bullish. Cat was the third best performer in the Dow Jones for the month of April-up over 25%. If you are relatively optimistic and think the market/economy has bottomed, and is bound to move higher in the months to come, you won't want to miss CAT... As it may be off to the races.

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2 comments:

August said...

Marco,

would you consider buying a call option for july or august? (or perhaps another month)

Your article, and my agreement about gold, leads me to think that CAT is a strong bet in the upcoming few months at least.

Marco H said...

August, as CAT has ran up so quickly I would advise to wait until a slight pull-back. It could pull back to 33 and still be quite bullish. With that being said I would look at an option with little implied volatility, and maybe even beyond August. But if you had to chose between July and August I would take a higher strike price and August. Speculating on gold, you may want to go out even longer, as inflation is still not a major threat in the short-term. What were your thoughts and strike range?

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