Should Caterpillar Still Be the Best DJIA Stock of 2016?

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24/7 Wall St. wanted to see what has happened with Caterpillar’s share price. Caterpillar ended 2015 at $67.96, without adjusting for dividend payments, for a total return of −23% in 2015. For 2016, the consensus price target from Thomson Reuters in the first week of January was $68.19, and now shares are right at $83.50. The consensus price target as of August 12, 2016, is $72.06.

Another issue making Caterpillar’s status as the top Dow stock is that this was not at all 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, even you included its 4.5% dividend yield at the time.

The hoped for recovery in China continues to help here. Continued restructuring (lower headcount) is also viewed as a boost. Gold’s completely unexpected rise for 2016 was also not a factor at the start of 2016. A small business recovery has been seen in some of the metals companies, but some of this is just companies focusing on profitable operations while slowing down on losing ones.

Another shocker here is that Caterpillar’s earnings trends remain in decline. Analysts have lowered and lowered the targets for earnings revenues, and it seems obvious that the real outcome on growth versus contraction may rely on matters outside of the U.S. company’s control. Perhaps the dividend and buyback efforts are giving investors the confidence to ride out this storm.

It seems impossible to imagine that stock market bulls would have guessed that Caterpillar’s shares would be the best performing Dow stock in mid-August. The fundamentals here are not recovering yet, but the discounting efforts of the market are looking out into 2017 or beyond for margin and earnings.

Before getting too excited about Caterpillar’s 2016 rise to $83.50, do not overlook that Caterpillar was a $115 stock back in April of 2011. It still has a long way to rally before its return to new highs. Revenues were $47 billion in 2015, versus $55 billion in 2014 and in 2013. Revenue in 2012 was $65.9 billion. Analysts see revenues of $40 billion in 2016 and almost $40 billion in 2017 — and revenue projections are still just $40 billion for 2018.

This is one of those mystery rallies, and the analyst community seems to think it has run up too far. Caterpillar share buyers have acted differently. A rational investor might expect that further gains would need to be preceded by announcements of some expected improvements.

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