The analyst who recommended this stock commented that (CAT) “has a 2% dividend yield, but that's really just a side benefit. The company's five-year average P/E ratio is 16. Were it only to rise from its current 10.1 multiple to 13 (assuming it hits its projected 2012 earnings), that would mean $117 a share—a 31% total return.”
(CAT) closed 2011 at $90.60 and while this analyst did give a price target, quite a few do not. In the majority of cases they will also not give a suggested entry level or stop. This is one of my key complaints about these yearly top stock lists.
The weekly chart of Caterpillar Inc. (CAT) shows the 2011 close, (point 1) at $90.60. On the first day of 2012, (CAT) opened at $92.77 and a stop under the December low of $86.29 (such as $85.92) would be the tightest that seemed reasonable. This would have been a risk of 7.3%.
In 2013, be sure you calculate the risk of every new trade before entering an order. Too many ignore the risk of just a few of trades each year, which can seriously impact the performance of your whole portfolio. For 2013, concentrate on risk.
(CAT) rallied for eight weeks and made a high of $116.95, which was very close to the analyst’s $117 target. At this point, the position had a 26% gain. As it turned out, that was the high for the year, as by July (CAT) had dropped to a low of $78.25. If you bought at the year’s opening price, you then had a loss of 15.6%. (CAT) closed the year at $86.81, which was a loss of 6.4% for the year.
Of course, I feel that fundamentals are often a lagging indicator and a stock can drop 20% and still be a growth company. Technical analysis can help you time your entry, as well as a price level where you should buy or sell.
Regular readers know that I spend quite a bit of time determining an entry level and while I sometimes miss buying a big winner by a few cents, occasionally I also buy a market low. There are quite a few stocks that I do not write about because the risk/reward profile is not favorable.
I use a number of technical tools to determine when and where to buy. For example, I use starc bands to tell me when not to buy and when to wait. As for entry levels I use a combination of pivot point analysis, Fibonacci as well as simple tools like the 20-period EMA. As most of you are aware, in an uptrending market, pullbacks to the 20-day EMA often provide a good entry point.
In my review of some of the “hot lists, I have found very few that recommend a specific entry level. If you are looking to buy one of the highly recommended stocks for 2013, you must determine your own entry level. Concentrating on the entry level could pay off big in 2013.
NEXT PAGE: The Importance of Stops