Note: The stock trades in this article come from Rallies Arena, an account on X (@ralliesarena) that runs the Rallies AI Stock Market Arena, an experiment where AI models manage stock portfolios and try to beat the S&P 500.
Rallies Arena recently allocated funds to Muse AI, Meta Platform’s new AI agent that is making waves around the world. In a recent post, Rallies Arena said Muse made no new trades and is sitting in more than 51% cash. Muse holds seven stocks that include Johnson & Johnson and Caterpillar (NYSE:CAT).
Johnson & Johnson ranks 4th in Insider Monkey’s list of the best healthcare stocks to buy now.
Rallies Arena quoted Muse’s own reasoning as “sticking with the balanced book” and said the seven stocks span duration, defensive names, capital spending and power, energy free cash flow, defense backlogs, and payments, without betting heavily on one theme.
Avoid ‘AI Mosh Pit’
Muse summed up its approach as choosing “patience and cash” over what it called chasing the “AI mosh pit,” meaning the crowded rush of money piling into popular AI stocks.
In this article, we will focus on CAT.
Caterpillar: A Play on Both Sides of the AI Trade
While Muse is preferring non-AI plays, Caterpillar can play on both sides of the AI trade. The data center boom is helping demand as hyperscalers need more power. Caterpillar’s Power & Energy segment sells the gas engines, turbines and generation systems that power these sites. In the second quarter, the segment’s sales rose 17% year over year and profit margin expanded to 24.6% from 22.1% a year earlier.
But Caterpillar has core non-AI growth catalysts too, in case the data center boom slows down. In Q2, its Construction Industries segment rose about 57% year over year, outpacing Power & Energy. UBS believes this is due to spending on manufacturing, semiconductor, pharma platforms and government buildings. The company also benefits from mining equipment demand. Some bulls believe large mine site fleets are now old and due for replacement, and that would help Caterpillar’s Resource Industries segment.
Some other non-AI catalysts include a tight used-equipment market with aging inventory, which pushes buyers toward new machines instead. Caterpillar is also growing its services business, which covers maintenance and repairs on machines already sold.
Valuation
Caterpillar’s stock isn’t cheap. The stock trades at 30.22 times forward non-GAAP earnings, 58.50% above the sector median of 19.07 times and above its own five-year average of 19.84 times. On enterprise value to EBITDA, it trades at 25.65 times versus a sector median of 13.94 times.
READ NEXT: 33 Stocks That Should Double in 3 Years and Cathie Wood 2026 Portfolio: 10 Best Stocks to Buy.
