Half of 2013 is in the books, and the Dow Jones Industrials (DJINDICES: ^DJI ) are up 14% on the year thus far. But several stocks haven't managed to do nearly as well as that, and a couple have lost ground despite the overall average's strong performance. Let's look at these two losing stocks and some of the other laggards in the Dow try to figure out why they've trailed behind in a strong market.
The commodities connection
The preceding graph shows that Caterpillar (NYSE: CAT ) and Alcoa (NYSE: AA ) are the two stocks that have given shareholders losses so far in 2013, despite the Dow's general strength. It's no coincidence that these two stocks also happen to be the most exposed of the 30 Dow components to the construction and commodities industries. Alcoa supplies aluminum that's essential for a wide variety of industrial, construction, and infrastructure uses. Meanwhile, Caterpillar makes heavy equipment that construction companies use in building projects, and mining companies are also big buyers of Caterpillar's products.
For years, both Alcoa and Caterpillar benefited from intense activity in the construction and infrastructure areas, especially within fast-growing emerging-market economies. China in particular was a big source of strength for Caterpillar, as it represented a huge new market for the equipment maker. Lately, though, slowdowns in Chinese growth have curtailed construction activity within that nation, and even worse, the slowdown has hurt the economies of the countries that provided raw materials for China's boom. Emerging markets around the globe are feeling the pressure, and that has sent commodities prices falling, which in turn has hurt the profits of the companies that mine and refine those commodities. Caterpillar and Alcoa now face the specter of a downward spiral, where the vicious circle of falling prices could continue until economic activity picks back up again.
The smallest winners
Meanwhile, IBM (NYSE: IBM ) and ExxonMobil (NYSE: XOM ) are also toward the bottom of the pack in the Dow, although they've both at least managed to eke out small gains. IBM's long-term strategy of emphasizing high-margin information-technology consulting and services has helped it avoid the profit crunch that many of its hardware-focused peers have suffered. But lately, IT spending hasn't been as robust as it was earlier in the recovery, and recent news from rival Accenture of a further slowdown hit IBM's shares hard on the last day of the second quarter.
For Exxon, the challenge lately has been keeping its production levels up. Although Exxon has done a good job of replacing its production by adding new reserves -- posting a 115% reserve replacement ratio in 2012 -- it projects that it will have to spend a whopping $190 billion on capital projects over the next five years to find new opportunities. That's a big gamble, given the increasing cost involved in using unconventional production methods and the ever-present volatility in energy prices.
Can these companies rebound?
Of these four companies, Caterpillar appears to be in the best position to turn things around. The company has extensive exposure to the U.S., and everyone knows that American infrastructure is in dire need of repair and improvement. If the U.S. economy keeps leading the world higher, then Caterpillar is best positioned to take advantage and reverse its losses.