May 23, 2012
Something just didn't feel right. I've followed equipment manufacturer Terex (NYSE: TEX ) pretty closely over the past several years and admired the company's adaptations to some very challenging business conditions. But when the stock surged beyond $26 per share a few months ago, I grew uncomfortable with both the share valuation and the technical picture, so I stepped outside of my comfort zone to issue a near-term bearish call on the shares.
As it turned out, the stock pulled back even more sharply than I feared. By late last week, Terex had shed some 35% in less than three months, and I leapt at the chance to re-initiate a bullish CAPScall on the stock at $16.82 last Thursday. In the interim, the shares eroded from a lofty valuation of 15 times estimated 2012 earnings to a far more alluring single-digit multiple. After shedding a relative premium over its equipment-manufacturing peers, Terex now trades at a comparable 2012 earnings multiple to the iconic behemoths Caterpillar (NYSE: CAT ) and Deere (NYSE: DE ) . The following chart covers the period from Feb. 24 -- when my article calling for the pullback appeared -- to May 17, when I reinitiated my bullish CAPScall. As you will see, the entire group of equipment manufacturers suffered noteworthy weakness relative to the slipping Dow Jones Industrial Average (INDEX: ^DJI ) , while Terex and mining equipment specialist Joy Global (Nasdaq: JOY ) vastly outpaced Caterpillar and Deere to the downside.
TEX data by YCharts
On the technical side, the Relative Strength Index shifted cleanly and convincingly from overbought territory above RSI(14) 80 to deeply oversold territory beneath an RSI(14) of 20. Although I characterize myself as a fundamental value investor with a strictly long-term focus, I do employ technical tools quite routinely to help inform the timing of purchases and sales. Because I issued my call for a pullback just after a trio of analysts had issued "outperform" ratings on the stock, the elevated RSI reading provided a welcome confidence boost to my Foolish contrarian call.
Oddly enough, this marks the second time this long-term buy-and-hold investor has called for a pullback in shares of Terex that could have spared investors from a subsequent 35% decline in the stock. In the wake of this latest decline, I hold a bullish outlook from these levels. First-quarter operating cash flows from Terex have been consistently negative for about a decade, but in the first quarter of 2012 Terex turned cash-flow positive for the period. I will continue to watch Terex closely and track the company's operational achievements over time, and I invite you to follow along by bookmarking my article list or following me on Twitter. This company has proven its mettle in adapting to a grueling business cycle, and I believe the recent pullback offers long-term investors a dramatically compelling entry point.
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