CAT and CMI are stocks with similar profiles. Both companies are both closely tied to the global industrial cycle. Both companies get more than 60% of their revenues from abroad. Both companies have seen their prospects fluctuate on Chinese growth booms and busts. So no surprise, both stocks are highly correlated.
But in the past 3 months, CMI has gone gangbusters while CAT has stagnated. Both have had poor earnings results in the past 6 months, but the market is ratcheting up its expectations for CMI in 2013, while leaving CAT behind. Here is the 3 year chart comparing the 2 stocks, CMI in black, CAT in orange:
As you can see, CMI vs. CAT performance is near a 3 year high. I am of course hoping that previous history repeats, and CMI falls back in line, since I initiated a CMI put spread on December 5th.
So far, I’m still twiddling my thumbs, as CAT is down almost 4% in the past 2 days, while CMI is down 0.5%. But as you can see from the 3 year chart, CMI can move quickly in both directions, so maybe some catch up is in order. I bring this chart up because when I initiated the CMI trade, I had considered trading a CAT put spread instead. Similar theme, just different stock. I chose CMI because of this chart, its more expensive valuation, and higher beta. So far though, the outperformance has simply widened to 3 year highs. My one month trade has the chips on convergence rather than continued divergence.