The Motley Fool Previous Page

The Best Dow Stock Everyone's Selling

Dan Carroll
April 10, 2013

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-m