Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Michael Burry Shorting Caterpillar Reveals a Peak-Cycle Signal
Transcript
- Lucas: So the S&P 500 closed at 7,499 yesterday, the Nasdaq is up nearly three percent in the last five days, and small caps just had their best first half in 35 years. And right in the middle of all that optimism, Michael Burry discloses he's shorting Caterpillar. Luna: Wait — Burry has shorted tech before, but Caterpillar? That's a new one. What's his thesis? Lucas: According to the filing, he's short roughly one point two billion dollars' worth of Caterpillar stock. He says it nearly doubled in the ai driven rally of 2026, and now the valuation is detached from the underlying cycle. Caterpillar trades at about 26 times forward earnings, which is a premium to its historical average of around 15. Luna: But Caterpillar isn't an AI company. Why did it double? Lucas: That's the key question. The market has been pricing in a massive infrastructure boom tied to AI data centers — power generation, backup generators, construction equipment for all those new buildings. Caterpillar is a proxy for that. But Burry seems to be saying the market has gotten ahead of itself. Luna: So the short isn't about the company being bad — it's about the cycle being mispriced. Lucas: Exactly. And there are real headwinds. About 30 percent of Caterpillar's revenue comes from Asia, a big chunk of that from China. China's property market is still in a slump, and infrastructure spending there is slowing. Meanwhile, commodity prices have softened — copper is down about 8 percent from its peak. Miners are cautious on capex. Luna: So you've got a cyclical stock priced for a boom that might not materialize as expected. That's classic Burry territory. Lucas: Right. And it's not just the revenue risk — the valuation itself is stretched. Caterpillar's price to earnings ratio is around 26, but its return on invested capital has been declining. In 2021, ROIC was about 18 percent. Last year it was closer to 14. So you're paying a higher multiple for lower returns. Luna: But Burry is also early on a lot of his trades. He shorted the housing market in 2005 and lost money for a while before the crash. For a stock picker listening today, does this mean you should short Caterpillar too? Lucas: Probably not. Burry has the capital and patience to sit through a lot of pain. For most individual investors, shorting individual stocks is incredibly risky — you have unlimited downside potential. But you can use the information as a signal. Luna: What kind of signal? Are you saying look at short interest for other cyclical stocks? Lucas: Partly. But more importantly, look at the narrative that's driving the stock. Caterpillar doubled because of the AI infrastructure story. If you're building a concentrated portfolio, you need to ask: is the story already fully priced in? What would have to go wrong for the stock to fall 30 or 40 percent? Luna: And in this case, you can list the risks: China slowdown, commodity downturn, falling ROIC, high multiple. That's a pretty clear checklist. Lucas: Another thing to watch is insider selling. Over the past six months, Caterpillar insiders have sold about 45 million dollars' worth of stock, and there have been zero insider buys. That's not a smoking gun, but it's consistent with the thesis that those closest to the business see headwinds. Luna: So if you're a stock picker, you might not short the name, but you could trim your position or avoid adding. Or maybe look for a more attractively valued play on the same theme. Lucas: Right. And that brings us back to the broader market. The S&P 500 is near all-time highs, small caps are finally participating, but the rotation into cyclicals has been sharp. The Russell 2000 is up over 20 percent in the first half. That's the kind of move that often gets overdone. Luna: Burry shorting Caterpillar might be a canary in the coal mine for the cyclical trade. Not because he's always right, but because he's asking the hard question about sustainability. Lucas: Exactly. And as active stock pickers, that's what we should be doing too — questioning the consensus narrative, especially when it feels too easy. Luna: Before we wrap up, I want to mention something. You know how we often talk about thinking independently and questioning the consensus? That's the same spirit that keeps this show going without ads or sponsors. Lucas: It's true. We're able to do this because some listeners choose to support us. If you've found value in our conversations — maybe a stock idea, a framework, or just a different way of thinking about risk — and you want to help keep the show independent, you can buy us a coffee at buy me a coffee dot com slash fexingo. Luna: No pressure, no perks, just a way to say this matters. And we genuinely appreciate it. Lucas: So back to the market. The key takeaway from the Burry trade isn't to copy it — it's to use the logic. Look at what's been priced in, check the fundamentals, and ask whether the cycle is turning. That's how you build a concentrated portfolio that survives the inevitable drawdowns. Luna: And maybe keep an eye on insider selling and short interest as additional data points. They're not perfect, but they're useful signals. Lucas: Yeah. Caterpillar isn't the only stock with that profile. We're seeing similar dynamics in some industrial and materials names. The next few months will tell us whether Burry is early or right on time. Luna: And for us, it's another reminder that in a market at records, the best opportunities might be in asking what could go wrong.