Why Alcoa and Caterpillar Are Holding Back the Dow

Today's 90-point drop for the Dow Jones Industrials (DJINDICES: ^DJI  ) came as investors worried about global macroeconomic issues, like the banking crisis in Cyprus, and continued weakness in economic growth in Europe and China. Although the Cyprus situation is a new development, concerns about larger economic woes affecting worldwide industrial activity have limited the gains in the stock market, and arguably prevented the S&P 500 from reaching its own all-time record high.

Today, both Alcoa (NYSE: AA  ) and Caterpillar (NYSE: CAT  ) lost ground, with Alcoa falling more than 1%, and Caterpillar posting a fractional loss. But when you look at the entire year to date, the two stocks have been the two worst performers in the Dow so far in 2013, as the only two Dow components that have suffered negative total returns.

On numerous occasions, Caterpillar has reined in optimism about its business, especially in China. Even as the U.S. economy has shown signs of improvement, the extensive high-profile construction projects that define Caterpillar's core business haven't really come back in full force, as hamstrung government budgets at the federal and local level have forced delays in taking on infrastructure maintenance and construction projects. Moreover, in China, attempts from government leaders to slow the rate of inflation have already had an impact on economic growth, and will continue to do so in the future, hurting Caterpillar's business.

Meanwhile, Alcoa has shared Caterpillar's challenge of dealing with internal competition from within China, as Chinese producers have played a major role in keeping aluminum prices depressed. U.S. companies in the solar industry have had to deal with that phenomenon before, as both First Solar (NASDAQ: FSLR  ) and SunPower (NASDAQ: SPWR  ) have endured a long malaise, as Chinese solar rivals have stayed in business despite, in some cases, having negative gross margins. Finally, a weeding-out among solar stocks has started to break the industry into winners and losers, and First Solar and SunPower look like likely survivors from the melee. Similarly, Alcoa has taken steps to emerge victorious in the long run, but as long as Chinese aluminum producers keep prices down, the short-term prospects for the industry look bleak.

Both Alcoa and Caterpillar stand among the leaders of their respective industries, but Caterpillar is more likely to see the quicker rebound due to its relative strength and ability to beat out its competition. To find out whether Caterpillar is a smart buy despite the economic worries plaguing the company and its key markets, you won't want to miss reading our premium research report on the construction-equipment giant. Just click here to access it now.


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  • Report this Comment On March 22, 2013, at 12:04 PM, RandomWalk2000 wrote:

    Pundits continue to reiterate erroneous conclusions about the effect of China's economic weakness on CAT earnings.

    China currently contributes a miniscule 3% of CAT's revenue. To continue maligning CAT's future earnings prospects based on China's economic weakness is not well founded.

    As China contributes a minimal amount to CAT's revenue, growth in China is not critical to CAT's financial results.

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