Great Call on Caterpillar! What's Next?

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The rally of the past couple of months, which has sent the stock market shooting skyward, put a major tailwind behind Caterpillar's (NYSE: CAT) stock. Since trading down to under $22 per share in March, Cat has charged back more than 70%, easily outpacing the rest of the market.

And that shouldn’t be all that surprising. Though Cat's near-term outlook for earnings isn't so hot, it is one of the premier players in the market for construction equipment, and will be ready to rake it in when construction work picks back up.

The members of The Motley Fool's CAPS community hadn't underestimated the strength of Caterpillar's business -- the stock has consistently maintained at least a four-star rating (out of a possible five) on CAPS. And while more than 4,600 members have given Cat's stock a thumbs-up, some have managed to hit the timing right on the head. clanza875, for example, is one of the score leaders for Caterpillar and managed to do it by giving the stock a thumbs-up on the exact day back in March that it established its closing low price.

clanza875 is one of CAPS' All-Stars -- players with a rating of 80 or greater -- and has managed an impressive stock-picking accuracy of 71% while racking up more than 1,300 points. Caterpillar isn't this player's only great call. Here's a look at a few of the other prescient picks:

Company	Date Picked	Call	Points	CAPS Rating
Research In Motion (Nasdaq: RIMM)	3/2/09	Outperform	73	**
DryShips (Nasdaq: DRYS)	2/23/09	Outperform	83	**
Crocs (Nasdaq: CROX)	10/16/06	Outperform	117	*

Data from CAPS. Picks on Crocs and DryShips were closed on 6/14/07 and 5/8/09, respectively.

So what is this investor looking at these days? Here are a few of the most recent calls on CAPS:

Company	Date Picked	Call	CAPS Rating
Diageo (NYSE: DEO)	5/13/09	Underperform	*****
Paychex (Nasdaq: PAYX)	5/8/09	Outperform	****
BlackRock (NYSE: BLK)	5/18/09	Underperform	**

Data from CAPS.

While not all of these picks may pan out, they could be a good place to start some further research. I decided to take a closer look at Paychex.

Strength in numbers
Back in March, CAPS member SJLooseCannon became one of the nearly 1,000 CAPS members to rate Paychex an outperformer, pitching:

Paychex has a business model that can perform in all economic environments. It has no debt and a nice balance sheet. The current 5% Dividend is nice and the stock will really rebound when the economy rebounds and they can earn more revenue on the client funds they hold in reserve.

Paychex's balance sheet stands in stark contrast to the statements from the companies that are giving investors nightmares right now. Instead of struggling under a heavy debt load, Paychex can claim to not only be debt free, but to hold nearly $500 million in cash and investments on its books.

And while the current dividend yield is no longer the 5%-plus that SJLooseCannon referred to, the 4.5% yield is nothing to sneeze at -- particularly with 10-year Treasuries yielding just over 3.2%.

And that's not to mention the inherent stability of Paychex's business. The company provides outsourced payroll, human resources, and employee benefits, a line of business that will likely feel some hurt from the recession, but should continue to provide a high level of predictable, reliable income.

Cheap enough?
If there's a knock against Paychex, it might be that its stock hasn't gotten nearly as cheap as many others during the market's downturn. Though it's off roughly 40% from its 2007 high, it's still changing hands at nearly 18 times its trailing earnings. It would be great to see this get cheaper, but the relatively high price could also signal investors' belief that this is a high-quality company that will justify the valuation by pumping out earnings over time.

Though I tend to avoid pricier stocks, I've given Paychex a thumbs-up in my CAPS portfolio. What can I say? I'm a sucker for a business model with recurring revenue streams.

But here's the important question: What's your take on Paychex? Will it show its strength in the face of recession? Get in the action by clicking over to CAPS. It's absolutely free and already has more than 130,000 stock pickers chipping in to find the best stocks out there.

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