Bill Gates Raises Stake In Caterpillar Despite Wall Street’s Dismal Short-Term Predictions
While research firms bicker over short-term earnings multiples of heavy equipment giant Caterpillar Inc. (NYSE: CAT), Bill Gates clearly sees a company whose best days are ahead. His investment managers have recently deepened his position in the company even as Wall Street is citing concerns that CAT is coming under increasing pressure due, in large part, to a slumping economic outlook for China which has led to fears of an impending sluggish global commodities market. As of the last quarter, Gates owns 10.76 million shares in Caterpillar.
Wall Street analysts reckon that Caterpillar’s profits will fall 30 percent this year and are unlikely to rebound before 2015. The company’s $65 billion in annual sales for 2012 is also not going to be seen again anytime soon. EPS growth for Q3 2013 was dismal at -23.89 percent and is predicted to be -26.68 percent for the year. These dire predictions have caused analysts at investment firm Merrill Lynch and research firm Zacks to issue a hold rating on the stock. All of which begs the question; what does Bill Gates see in CAT that Wall Street is missing?
The answer is simple. Gates and his team focus on the robust long-term prospects of a company, nimbly bypassing short-term economic shifts. It’s a pretty neat trick he may have picked up from his good buddy Warren Buffett. In the case of Caterpillar, he sees a company that is actively accelerating product development spending. A jump in capital expenditures generally means a strong competitive platform to deal from in the future. The company also has limited competitors that are capable of making the colossal equipment needed to dig the vast holes that mining ventures require. Toss in the fact that Caterpillar has such a healthy cash flow that the company raised dividend returns at double digit velocity in 2012 and again in 2013, and what’s not to like?
Gates has a history of being bullish on long-term plays. He is well known as being a passive, long-term investor, much like his friend Buffett. It has served him well. As of the beginning of September, the Bill & Melinda Gates Foundation held positions in only 21 companies which had a portfolio value of $17.8 billion. Half of that value came from Berkshire Hathaway (NYSE: BRK.A), Warren Buffett’s firm. Gates seems to prefer financial service stocks, industrials, and consumer defensive plays. The three sectors represented around 81 percent of his full asset allocation.
As for Caterpillar, the company has a current market cap of $56.36 billion and is trading at around $87 at the time of this writing. If you’re thinking of putting money here, bear in mind that the company is highly susceptible to the vagaries of a fickle Chinese economy. Three days ago it was the largest gainer on the Dow Jones based on positive news about the Chinese economy. Today it is trading down, based on negative news about the Chinese economy. And though it had a good showing on the Dow on Monday, it has underperformed its Dow peers by a wide margin in 2013.
The bottom line is that we cannot all invest on the sheer scale of a Gates or a Buffett, but it’s interesting to watch how they capitalize on their plays and to try to analyze their reasoning. Always exercise a little due diligence before putting your money anywhere.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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