Why Are These 3 Dow Jones Stocks Crushing the Market in 2014?

Intel, Caterpillar, and Merck were the Dow's best performers in the first half of 2014. Why did these three stocks race ahead, and where are they going next?

Jul 2, 2014 at 2:00PM

We just passed the halfway point of 2014, and so far it's been a mixed bag for large-cap investors. The Dow Jones Industrial Average (DJINDICES:^DJI) has risen by a measly 2.3% year to date.

But three Dow stocks ran ahead of the pack in the first half of the year. Here they are:

^DJI Chart

^DJI data by YCharts.

How did Caterpillar (NYSE:CAT)Intel (NASDAQ:INTC), and Merck (NYSE:MRK) beat their Dow peers to the halfway point of 2014? And where will they go next?

Rumors of the PC's death have been greatly exaggerated
For nearly five months, Intel shares stumbled right alongside the Dow's hits and misses. Along the way, the chip giant delivered one positive and one negative earnings surprise. It was business as usual, which isn't always a good thing.

But near the end of May, Intel's mobile computing fortunes started to change. The company said it was winning design bids in Android tablets, and it partnered up with Chinese tablet-parts expert Rockchip. Intel shares began climbing.

Fool Flickr Intc Photo

In the middle of June, the stock suddenly surged nearly 7% higher overnight. In a break with tradition, the company updated its next-quarter guidance between earnings seasons. The second-quarter revenue outlook was boosted by 5% thanks to strong sales of processors for corporate PC systems.

In other words, the personal computer isn't quite dead yet. This was the catalyst that put Intel at the head of the Dow's 2014 class.

Intel will report earnings for that guidance-boosted quarter in just two weeks. This is where the company gets to underscore its rosy PC market projection -- or suffer the consequences of disappointing investors.

Keep a close eye on sales growth in the PC client group, with a special focus on sales projections for the corporate year-end budget flush and consumer back to school seasons. Investors and analysts will hang on Intel's every word regarding these segments, and anything less than apple-cheeked optimism is sure to erase June's big gain.

Merck's march to the top
Merck started the year in fine form. The Big Pharma stock soared in January as Merck abandoned a costly and uncertain research avenue. The fourth-quarter 2013 report in early February was solid if unspectacular, and the good times kept rolling. Later, the company announced late-stage FDA trials for a potential blockbuster diabetes treatment, and the feds gave Merck priority review status for an even bigger drug candidate: cancer buster MK-3475, which boosts the all-natural PD-1 cell-death protein.

That's all good stuff for a research-focused drug developer such as Merck. The product pipeline may still be risky, but it's packed with blockbuster-scale promise.

Mrk Explore Our History

Source: Merck.

The relatively smooth climb took a big break in early May, when Merck sold its consumer care division to sector rival Bayer (NASDAQOTH:BAYRY).

A $14 billion deal like this typically boosts share prices all around, but not this time. Merck shares plunged on the news, as investors saw the company taking a loss on the acquired Schering-Plough assets while going back on a fairly recent promise not to spin off divisions. Moreover, Merck is now a very pure play on big-ticket drug development, without the buffering effect of lower-margin but high-volume consumer products.

The payoff from this strategy could be huge if most of Merck's major drug programs become big hits, but it's also a very risky tactic. Investors hate uncertainty, so you're getting a risk-based discount on Merck these days.

Even so, the stock got right back to climbing higher in May and June. Shares are roughly back to where they were before the Bayer deal, risk rebate and all.

Merck today is the purest play on big-ticket pharma development on the Dow. Investors need to understand the risks and rewards of the new high-wire strategy before taking the plunge. Foolish pharma pro Brian Orelli can set you on the right path.

Caterpillar, the economy's best weather vane
Finally, heavy-machinery builder Caterpillar took the Dow's overall crown in the first half of 2014 with a 20% gain.

Fool Flickr Cat Photo

Generally speaking, Caterpillar fares well when the American and global economies are humming. The company sells more bulldozers, backhoes, and mining drills when local and state governments invest in their infrastructure. Thus, this stock spikes higher than any other Dow member when there's good economic recovery news out of China or the U.S. It also plunges harder and faster than most when the economic news is bad.

For example, Caterpillar jumped 2% in early April when the U.S. Commerce Department reported surprisingly strong factory orders. That's a pure economy barometer moving Caterpillar shares in a very direct way.

The mining division has been a sore spot for Caterpillar in 2014, but construction machinery is moving like gangbusters. The American market is particularly solid, while the company is still looking for sharper turnarounds in Europe and Asia. And if all of this sounds like a mirror of the global economy, you'd be right.

That's just the way Caterpillar rolls, and it has served the company well in 2014. A bet on Caterpillar is a bet on economic recovery across the globe. Invest accordingly.

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Anders Bylund owns shares of Intel. The Motley Fool recommends and owns shares of Intel. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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