The Best Dow Stock Everyone's Selling

It's hard to imagine that any stock on the Dow Jones Industrial Average (DJINDICES: ^DJI  ) has struggled this year. After all, the index has gained nearly 9% and has hit record highs day after day. What could be better for blue-chip investors?

Even with all the optimism surrounding the markets, one of the Dow's biggest names has suffered through a tough year. Caterpillar (NYSE: CAT  ) hasn't been able to take advantage of 2013's market surge; instead it has fallen 8% year to date as economies worldwide have slumped and the industrials sector has slowed. Caterpillar remains on top of its sector, however, and with one of the cheapest valuations in the Dow, is this a can't-miss opportunity to pick up a household name on the cheap? Or is this Dow stock a trap?

Struggling with sales
No doubt Caterpillar's had a tough time lately. Sales growth slipped hard last year, falling to a year-over-year increase of just 9.5% in 2012 after growing at a far faster clip the year before. The company's revenue projections of between $60 billion and $68 billion leave even less room for growth in 2013 – and Caterpillar could potentially be looking at slipping sales for the full year.

The worldwide economy has slowed, but Europe in particular has taken down the entire industrials sector. Manufacturing output in the eurozone continues to contract as the region's PMI fell to blow 47 last month; even vaunted Germany, long the industrial nexus of the continent, has seen manufacturing slip into contraction territory. Caterpillar and the rest of its sector won't find any relief across the Atlantic any time soon.

The stock's fallen more than any other name on the Dow this year, even more than fellow Dow laggard Alcoa (NYSE: AA  ) , which has also suffered from the industrials downturn and slowing commodity prices. Outside of Europe's problems and the sector's immediate woes, however, hope remains for Caterpillar – and the future could see this downbeat Dow stock rebound in a big way.

Signs of long-term hope
Sales are still slowing
in North America and Asia, two regions critical to Caterpillar's future. However, the housing market's rise in the United States bodes well for this company's future. With the entire industrials sector down, Caterpillar hasn't ceded its spot atop the industry to rivals; as the market picks up, this company will be poised to use its size (in an industry where size matters) to capitalize here at home.

Asia offers hope as well. Although the mining industry's decline in Australia and Asia and China's slowdown have taken the shine off of Caterpillar's Pacific luster, the region's far from stagnant. China's still growing at a quick clip, even if growth in the world's second-largest economy has fallen from previous highs. Chinese manufacturing picked up swiftly in March, with the nation's PMI hitting an 11-month high. The country's still facing ongoing urbanization, and Caterpillar has taken advantage by expanding facilities and production capability in China.

Although the Chinese government is looking to slow down bubbling home prices, don't expect construction to fall sharply in a nation that's seeing more and more workers relocating to fast-growing cities. If commodity prices dig out of their current lows and the mining industry gains some traction, Caterpillar will be poised to thrive in China. A cyclical sector such as industrials won't remain depressed forever, and long-term investors who can withstand Caterpillar's near-term slump will be the ones rewarded the most in the future.

Yet, is Caterpillar the best Dow stock for long-term investors looking to buy a great pick on a dip? The stock's forward P/E of 9.3 ranks as the third-cheapest on the Dow, and that's with analysts projecting modest earnings at best over the course of this year. The problems that have plagued Caterpillar aren't indicative of a fault with the company, either – with the entire sector going through tough times, Caterpillar's a victim of external forces, not internal ones. When the industrial sector picks up again, no company will be as well-poised to capitalize as Caterpillar.

Investors shouldn't expect a miracle turnaround in the near future: Economies remain sluggish, housing's still on the way up in the U.S., and China's still learning to handle its newfound wealth. For the long-term investor, however, Caterpillar's dip marks a great opportunity to buy a piece of a solid, steady company for cheap – and that's one of the best ways to create value in the long term.

No. 1 where size matters
Looking for all things Caterpillar? This company is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in The Motley Fool's brand new report. Just click here to access it now.


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