Einhorn Dislikes Caterpillar Inc.: Should You Sell Finning International Inc.?

David Einhorn is shorting Caterpillar Inc. (NYSE:CAT) stock, saying it will drop by half; Finning International Inc. (TSX:FTT) shareholders should be worried.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Greenlight Capital hedge fund manager David Einhorn told a packed house this week in New York that he was shorting Caterpillar Inc. (NYSE:CAT), the construction and mining equipment maker, which has lost one-third of its value over the past two years due to the ongoing commodities bust.

While analysts are calling for approximately 6% more downside on Caterpillar stock, Einhorn believes that the real number is more like 50%, suggesting this time next year it could trading in the $30s.

Who should you trust?

While Einhorn’s been wrong before (haven’t we all?), he’s not the only big hitter who’s pessimistic about Caterpillar’s prospects. James Chanos of Kynikos Associates, one of the first to predict Enron’s demise back in 2001, is also betting against its stock. That doesn’t jive with analysts’ opinions. Out of 22 ratings on the stock, only three have it as a “sell.”

Let me stop this conversation before it goes any further. Nine times out of 10, I’m going to take the opinion of two billionaires over a bunch of paid mouthpieces. Sure, it’s in Einhorn’s best interests to walk down Caterpillar’s stock price, but his performance—16.5% annual returns over the 20 years—suggests he should at least be taken seriously.

So, what’s the play on Finning International Inc. (TSX:FTT) given Einhorn’s dislike for Caterpillar? Should you be selling Finning stock at the moment and avoiding it if you don’t already own it?

Absolutely.

Forget the fact that Finning’s stock is up almost 19% year-to-date through May 10. That might be best described as a dead cat bounce. A sure sign that its stock price could be headed lower is the May 9 announcement by Finning that it was intending to repurchase up to 16.8 million of its shares, effectively reducing the total outstanding by almost 10%.

When your business is in the dumps, it’s best to put on a brave face by signaling to investors that management believes its stock is cheap. We are then supposed to get on the bandwagon, creating an artificial floor price for its stock. However, what happens if this is really just the precursor to the second leg of its move lower, the first being its two-year decline in 2014-2015 that saw its stock lose 27% of its value?

Shareholders lose twice.

First, investors will see their holdings reduced in value; the second kick in the groin is that management will overpay for many of the 16.8 million shares it intends to buy back over the next 12 months. It’s a double whammy because very few companies know how to repurchase shares when the stock price is below its intrinsic value.

Getting back to Einhorn, who also had a bad year in 2015, he sees Caterpillar’s annual earnings around the $2 level for the next two years, and as we all know, earnings drive stock prices. More importantly, that’s 75% less than what it earned in 2012. As far as haircuts go, that’s a big one.

Why should Finning be any different? It shouldn’t. There are better TSX stocks to own.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Will Ashworth has no position in any stocks mentioned. Finning is a recommendation of Stock Advisor Canada.

More on Investing

funds, money, nest egg
Dividend Stocks

TFSA Passive Income: 2 Great Canadian Dividend Stocks for Retirees to Buy Now

Retirees seeking reliable passive income can now buy top TSX dividend stocks at cheap prices.

Read more »

man window buildings
Stocks for Beginners

Foolish Beginners: 1 Stock Pick to Buy Now for a $6,000 TFSA

Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) stock looks cheap as shares regain their footing.

Read more »

data analyze research
Dividend Stocks

Earn Monthly Passive Income: 2 Hot Dividend Stocks in Canada to Buy Now and Hold Forever

These two hot dividend stocks could help you to earn stable monthly passive income in Canada.

Read more »

Human Hand Placing A Coin On Increasing Coin Stacks In Front Of House
Dividend Stocks

Be a Landlord: Top 2 REITs (With Monthly Dividends) I’d Buy and Forget

You can be a landlord and earn monthly dividends for the rest of your life. All you need is the…

Read more »

Target. Stand out from the crowd
Investing

3 Canadian Stocks to Buy That Beat Their Earnings Expectations This Week

If you're looking for top Canadian stocks to buy, here are three impressive companies that continue to perform well in…

Read more »

A stock price graph showing declines
Energy Stocks

2 Cheap Canadian Stocks That Likely Won’t Be on Sale For Much Longer

These two Canadian stocks are close to returning to all-time highs. Don’t miss your chance to take advantage of these…

Read more »

A worker gives a business presentation.
Dividend Stocks

Got $5,000? 3 Stocks to Hold for the Next 20 Years

New investors don’t need tens of thousands to start a portfolio. Here are three stocks to hold for the next…

Read more »

canadian energy oil
Energy Stocks

3 Rising Energy Stocks to Buy as Oil Hits 6-Month Low

Three rising energy stocks are strong buys today as their upward momentum is likely to continue due to the tight…

Read more »