1 inventory to purchase, 1 inventory to dump this week: Caterpillar, Peloton

  • Fed rate decision, mega cap tech gains, US jobs report in focus.
  • Caterpillar shares are a buy given strong earnings and revenue growth.
  • Peloton stock is likely to underperform amid sluggish earnings and a weak outlook.

Wall Street stocks rose on Friday, with major moving averages capping another strong week as investors cheered signs that inflation may be peaking and raised hopes that the Federal Reserve will be less aggressive.

For the week, the blue-chip was up 1.8%, while the benchmark and tech-heavy stock rose 2.5% and 4.3%, respectively, for their fourth straight weekly gain.

So far in the first few weeks of 2023, the Nasdaq is up 11%, while the S&P 500 and Dow are up 6% and 2.5%, respectively.

Source: Investing.com

The upcoming blockbuster week is expected to be a busy week of market-moving events, including a key Fed rate decision and a barrage of heavyweight earnings reports and economic data.

The Fed is expected to conclude its first monetary policy meeting of the year on Wednesday, which will lead to a 25 basis point rate hike on Wall Street, a step down from December’s 50 basis point move. That would bring the Fed Funds’ target rate range to 4.50% to 4.75%.

The Fed chair on the pace of future rate hikes will be in focus as investors ramp up bets that the Federal Reserve will halt its tightening cycle and even cut rates by the end of the year.

Additionally, earnings season is kicking off in high gear, with reports expected from the mega-cap tech stocks including Apple (NASDAQ:), Google parent Alphabet (NASDAQ:), Amazon (NASDAQ:) and Meta Platforms (NASDAQ:). .

The earnings agenda also consists of other high profile companies such as Advanced Micro Devices (NASDAQ:), Qualcomm (NASDAQ:), Snap (NYSE:), Exxon Mobil (NYSE:), McDonald’s (NYSE:), Starbucks (NASDAQ :), UPS ( NYSE:), Ford (NYSE:), General Motors (NYSE:), Pfizer (NYSE:) and Merck (NYSE:).

Elsewhere on the economic calendar, the US will be the most important on Friday for January, which is forecast to show solid job gains but a slowdown in growth in December.

Regardless of which direction the market is headed, below we highlight one stock that will likely be in demand and another that could see further downside.

However, remember that our time frame is only for the coming week.

Stock to buy: Caterpillar

After closing at a new all-time high on Friday, Caterpillar (NYSE:) stock I expect to continue its rally in the coming week as the thriving construction and mining equipment company is expected to deliver strong earnings and revenue growth when it reports its latest financial results on improving fundamental prospects.

The industrial giant, which is one of the 30 components of the Dow Jones Industrial Average, is up more than 10% so far in January on optimism about the resilience of the global economy.

CAT stock, which has significantly outperformed the Dow over the past year, closed at $264.54 on Friday, up from the previous record high of $262.12 set the day before. At current levels, the Deerfield, Illinois-based heavy equipment manufacturer has a market cap of $137.8 billion.

Source: Investing.com

Caterpillar’s Q4 results are due before Tuesday’s opening bell and should again benefit from an improving global growth outlook as China’s economy restarts and increased infrastructure spending in the US

Following the movements in the options market, traders are pricing in a roughly 4% swing either way for CAT stock post-release.

Unsurprisingly, earnings forecasts were revised upwards 20 times in the 90 days leading up to the earnings release, according to InvestingPro.

Consensus estimates are for earnings to increase for the sixth straight quarter to $4.03 per share, a 49.8% improvement over earnings per share of $2.69 in the year-ago period. Meanwhile, revenue is forecast to rise 14.7% year over year to $15.8 billion, reflecting robust demand for its wide range of construction, mining, and energy equipment.

Source: InvestingPro

If confirmed, these numbers would represent the highest quarterly earnings and total sales in Caterpillar’s history and demonstrate the strength and resilience of its operations.

Looking ahead, I expect the industrial giant to provide a bullish outlook for the remainder of the year as it continues to benefit from a strong combination of favorable industry demand trends and pricing strength amid the bright prospects for construction and mining equipment sales.

Stock To Dump: Peloton

Despite the recent uptrend, I believe Peloton (NASDAQ:) stock will underperform this week as the latest earnings report is likely to show another sharp slowdown in sales growth, adding to concerns about the long-term growth prospects of the loss-making exercise bike maker .

Based on the options market, traders are pricing in a big move for PTON stock post-update with a possible implied swing of 18.7% either way.

Results are due Wednesday before the US market opens.

Peloton has missed earnings estimates for six straight quarters while revenue expectations have lagged five times during that span, reflecting the negative impact of various headwinds on its business.

As might be expected, an InvestingPro survey of analyst earnings revisions points to mounting pessimism ahead of the report, with analysts downgrading their EPS estimates by about 87% from their initial 90-day expectations.

Source: InvestingPro

Consensus expectations call for the interactive fitness company — which sells stationary bikes and treadmills that allow monthly subscribers to take classes remotely via streaming media — to post a loss of -$0.64 per fiscal second quarter shares, given the ongoing restructuring costs associated with its massive turnaround effort.

Revenue is forecast to fall 37% year over year to $712.3 million as demand for its at-home fitness products dwindles amid the current economic climate and more people returning to the gym.

As such, I expect Peloton’s management to adopt a cautious tone in its guidance for the coming year as the company faces a challenging macroeconomic environment in which it is burning heavy cash reserves amid higher cost pressures and declining operating margins.

With the company currently having $939 million in cash, there is a legitimate concern that Peloton may run out of cash by the end of the year as it struggles to meet its turnaround plan and in a world after the world to regain a foothold in the pandemic.

Source: Investing.com

PTON stock ended Friday’s session at $12.65, its highest close since Dec. 5, giving the New York City-based company a $4.3 billion valuation.

Stocks, which tumbled alongside the tech-heavy Nasdaq at the start of 2023, are up a whopping 59.3% over the first 27 days of the year. Despite the recent reversal, the stock, which suffered a 77.8% annual decline in 2022, remains about 93% off the January 2021 record of $171.09.

Disclosure: At the time of writing, I am long the S&P 500 and Nasdaq through the SPDR S&P 500 ETF (SPY) and the Invesco QQQ ETF (QQQ). I’ve also long been with XLK, the Technology Select Sector SPDR ETF. I regularly adjust my portfolio of individual stocks and ETFs based on an ongoing risk assessment of both the macroeconomic environment and company financials.

The views discussed in this article are solely the opinion of the author and should not be construed as investment advice.


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