Market Shock: How Can Caterpillar Be the Best Performing Dow Stock of 2016?

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Caterpillar Inc. (NYSE: CAT) has had enough business problems of late to be monumental. China, Brazil, Russia and elsewhere are slow growth markets and have been for some time. The U.S. dollar strength also makes Caterpillar’s giant earth-moving and large transportation equipment more expensive outside of the United States. And then there is the slow capital spending climate and an environment in which there is excess used equipment that can be bought or leased.

When you add all this up, it ought to be a situation in which the troubles linger on the stock. In reality, Caterpillar magically has been the best performing of the 30 Dow Jones Industrial Average stocks so far in 2016.

24/7 Wall St. wanted to see what makes this possible. The first thing that needs to be noted is that Wall Street treats the stock market like a discounting mechanism. Investors are not just reacting to the news of today. They often have to try to be ahead of the curve, with an outlook that is six months out, or in some cases as long as 18 months out, in turnaround and value situations.

Caterpillar’s year-to-date performance is 26%, almost three full points higher than Wal-Mart’s. The median gain on all Dow stocks is right at 6%, and the Dow itself is up 9.3% so far in 2016. Several big analyst calls have been made in 2016, some of which seem miniscule and some that are not:

  • On July 27, Caterpillar was maintained as Sector Perform at RBC Capital Markets, but the price target was raised to $73 from $70, after having raised Caterpillar’s target to $70 from $68 back on April 25.
  • On April 26, Argus raised Caterpillar to Buy from Hold with a $92 price target.
  • On April 25, Goldman Sachs raised its rating to Neutral from Sell and put a $78 target on it, rather than the prior $62 target. That downgrade to Sell had been on January 25, with a $51 target, versus a then-current share price of $60.98.

Caterpillar ended 2015 at $67.96, without adjusting for dividend payments made since then, and that was a total return of −23% in 2015, including its dividend adjustments. For 2016, the consensus price target from Thomson Reuters in the first week of January was $68.19, and now shares are right at $83.00. The consensus price target as of August 12, 2016, is $72.06.

Another thing that makes Caterpillar’s top Dow stock position so surprising is that this was not expected at the start of 2016. When 24/7 Wall St. ran a 2016 bull-bear analysis for Caterpillar, the expected total return for Caterpillar was only 4.9% for the whole year (and that included its dividend yield of 4.53% at the time).

It seems that the hoped for recovery in China is helping the situation here. The move in gold was entirely unexpected, and gold mining and extraction these days requires massive earth-moving equipment. A small recovery has been seen in some of the metals companies, after they have curbed supplies and slowed down or shuttered unprofitable operations.

Lastly, Caterpillar’s earnings trends remain in decline. The issue is that analysts often lower targets and companies often give sand-bagged guidance. That makes the estimates easier to beat when the actual reporting comes around. In short, the bad numbers often do not look so bad when you compare them to estimates.

If you think back to the start of the 2016, chances are high that you would not have foreseen Caterpillar as the top-performing Dow stock almost two-thirds of the way through the year. If you did expect that, it might have been because you thought the market was heading lower.

Before getting too excited about Caterpillar’s 2016 rise to $83.00, just keep in mind that this was a $115 stock back in April of 2011. It still has a long way to go before its return to new highs. Revenues were $47 billion in 2015, versus $55 billion in 2014 and in 2013. Analysts see revenues of $40.1 billion in 2016 and $39.6 billion in 2017. Stay tuned.