Shares in Caterpillar (CAT 0.81%) rose 10.5% in November according to data provided by S&P Global Market Intelligence. Although the move comes pretty much in line with the S&P 500's gain in the month, there was some positive news on Caterpillar that could create a positive trajectory for the stock.
There were three positive catalysts for Caterpillar in November. First, the positive news on the coronavirus vaccine is obviously a good development for a highly cyclical stock like Caterpillar. Simply put, Caterpillar's end market customers are unlikely to order expensive equipment unless they feel confident in the economy.
Second, the latest sales data from the company indicates that its retail sales have bottomed and the trend has turned upwards -- all of its end markets were better in October than in September.
Third, Deere recently gave a relatively upbeat set of fourth-quarter earnings and even though its construction and forestry segment sales declined 16% in the fourth quarter, management is forecasting a 5% to 10% increase in the segment's net sales in 2021. That augurs well for Caterpillar's sales in 2021.
Caterpillar is a highly cyclical company. As such, its sales often overshoot estimates on the way up and then undershoot on the way down. Therefore, turning points, such as a bottoming of its retail sales really matter.
Indeed, Deere's construction equipment forecast and the retail sales data from Caterpillar suggest a bounce in sales in 2021 and Wall Street analysts have the company's sales increasing nearly 10%. However, don't be surprised if Caterpillar exceeds that estimate if the global economy picks up.
Clearly, Caterpillar investors will be watching the global economy and in particular, hoping for some infrastructure stimulus spending from Washington. The company probably needs it, because its current valuation is looking a little high relative to what it's been at previous troughs in the cycle.