We are initiating a position in Caterpillar (CAT), buying 55 shares at roughly $257.86 apiece. In addition, we are selling 50 shares of Starbucks (SBUX) at roughly $106.87 a share. Following Tuesday’s trades, Jim Cramer’s Charitable Trust will own 55 shares of CAT, starting its weighting in the portfolio at about 0.5%, and 700 shares of SBUX, decreasing its weighting in the portfolio to 2.58% from 2.76%. We’re intentionally starting our Caterpillar position on the smaller side due to the big moves the stock and the broader market have made recently. We have a war chest of capital right now thanks to our recent sales in high-multiple tech stocks . This new addition will increase our holdings of stocks that trade at reasonable price-to-earnings multiples and have long-term track records of dividends and buybacks. And we’re also looking to invest in companies, like Caterpillar, that are expected to benefit from a flood of federal infrastructure funds over the coming years. If CAT, or the broader market, cools in the weeks ahead, our large cash position will shield us from downside and we’ll put it to good work by steadily buying more shares into weakness. Texas-based Caterpillar is the world’s leading manufacturer of construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Caterpillar’s business is divided into three main segments – construction, resources, and energy and transportation. Within its construction unit, nonresidential makes up about 75% of the segment. We think this part of the business could strengthen over the next few years in the U.S. as a result of the federal government’s $1 trillion infrastructure spending law that President Biden signed last year. Caterpillar’s manufacturing operations should also benefit from government spending in connection with the Inflation Reduction Act and the Chips and Science Act , both enacted last year. Infrastructure and manufacturing projects should start showing up in CAT’s numbers and backlog in the second half of 2023 and into 2024. Regarding its resources division, commodity prices have come off their highs but remain at prices supportive of continued investment. The reopening of China’s economy should further support the commodity outlook this year. At the energy and transportation unit, Caterpillar’s oil-and-gas part business is currently seeing a lot of strength in reciprocating engine orders and solar turbines. Although its oil-and-gas production remains disciplined, Caterpillar points out that even maintaining production levels requires a certain amount of continued investment. CAT .SPX 1Y mountain Caterpillar (CAT) shares vs. S & P 500 (.SPX) The stock was a strong outperformer in 2022, gaining roughly 16% compared to the S & P 500 ‘s decline of around 19%, yet its price-to-earnings multiple still looks very reasonable to us. CAT currently trades at about 17-times its expected fiscal 2023 earnings-per-share consensus estimate of $15.32, which is up from estimates of $13.94 a share for fiscal 2022. Those earnings are supported by a robust backlog (about $30 billion at the end of the third quarter), strong pricing gains (up 14% year-over-year in the third quarter), and easing costs for raw materials. Looking out to fiscal 2024, consensus estimates are for earnings-per-share of $16.82, which would represent growth of about 10% year-over-year. And we expect those earnings estimates to be revised higher later this year as infrastructure spending kicks in. On capital returns, Caterpillar has a strong track record of returning cash to shareholders. It’s a dividend aristocrat, thanks to its 28 consecutive years of increasing its annual divided payment. The company increased its divided by 8% last June, and its current yield is about 1.7%. Caterpillar has also steadily repurchased its stock. The company announced a $15 billion share-repurchase program last May, and as of Sept. 30, CAT had approximately $13.7 billion remaining under this authorization. We are initiating our CAT position with a price target of $285 per share, about 10% higher than current levels, representing roughly 18.5-times fiscal year 2023 earnings-per-share consensus estimates, a slight premium on the S & P 500, which trades at around 17-times next year’s earnings. SBUX 1Y mountain Starbucks (SBUX) shares 1-year performance As for Starbucks , this small trim is consistent with our strategy of taking profits following the coffeemaker’s big run. Reinvigorated storefronts and an ambitious growth strategy in China mean there is a lot to like about Starbucks’ future, but the recent rally means a lot of that good news has started to get priced in. Shares are now trading at around 31-times the next 12 months’ earnings. The higher multiple is justified, but it also raises the stakes around execution. Out of prudence and general discipline after a large run, we’ll take some shares off and lock in a solid gain of about 26% on stock purchased in August . (Jim Cramer’s Charitable Trust is long CAT, SBUX. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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