China is not an outlier. The global market for commodities really is tanking. And consequently, Caterpillar (NYSE:CAT) is a sell.

This, in a nutshell, is what Goldman Sachs told us today.

China's slow boat is sinking
In a note to clients late last year, investment banker Goldman Sachs warned investors that China's "rotation" away from its role as the world's factory floor "has become a reality." This has contributed to a "glut in commodity supply," with dire implications for companies that sell into the commodity industry. This morning, Goldman finally made the logical response to this situation, and downgraded Caterpillar to sell.

Granted, this move has been a long time coming. As Goldman itself admits, "We are clearly not early on CAT." But the banker has already put "significant[ly] leveraged" heavy machinery makers Navistar (NYSE:NAV) and Joy Global (NYSE:JOY) on its sell list.

As tells it, Goldman has become convinced that the "commodity capex" cycle has farther to fall, and indeed, that the declines appear to be "accelerating." Yet other analysts are still predicting "mid-cycle" earnings for Caterpillar. This suggests the stock has farther to fall -- and that if Goldman was to recommend selling other heavily indebted industrialists, there was no excuse for not selling Caterpillar as well.

But is Goldman Sachs right?

Let's go to the tape
It's hard to say. Goldman Sachs' record to date certainly doesn't inspire confidence. Indeed, while it's perhaps the best-known name in investment banking today, Goldman's record for accuracy in the machinery industry is well below 50%, and the analyst is underperforming the market pretty badly in this sector.

On the other hand, Goldman does appear to have been right on its most recent sell recommendations in the machinery sector. According to our CAPS statistics, where we've been tracking Goldman's performance for years, this analyst's advice to sell Joy Global is currently outperforming the market by 87 percentage points. Its sell rec on Navistar has beat the market by 139 points.



Goldman Sachs Says:

CAPS Says:

Goldman Sachs' Picks Beating (Lagging) S&P By:




139 points

Joy Global



87 points




42 points

At the same time, Goldman's recommendation to buy shares of diesel engine maker Cummins (NYSE:CMI), made way back in 2009, continues to defy expectations. This leaves us with something of a conundrum: If Goldman's been a pretty poor picker of machinery stocks historically, but it's been generally right about the sector lately, does this mean Caterpillar, too, is a stock to avoid -- perhaps at least in the short term?

Let's crunch some numbers and find out. Profitable, and priced at 12.2 times earnings today, Caterpillar certainly looks to be in better financial fettle than either Navistar or Joy Global -- neither of which is currently earning any profits at all. Caterpillar is also priced more richly than buy-rated Cummins, at just 9.2 times earnings.

Given that most analysts (including, it seems, Goldman Sachs itself) believe that Caterpillar earnings are likely to decline by more than 6% annually over the next five years (according to Yahoo! Finance figures), while Cummins could eke out 5% annualized earnings growth, it's only logical that a buy-sell analyst might recommend selling the former, and buying the latter instead.

Granted, for the time being, individual investors may be willing to stick with Caterpillar in order to collect the company's fat dividend checks, which currently pay better than 5% annually. (That's as opposed to less than a 0.5% dividend at Joy and no divvy at all at Navistar.) But if things keep getting worse in the commodities sector, Caterpillar's dividend could become imperiled.

The upshot for investors
All things considered, if forced to pick a stock from all those named above, I think the strong profits, projected profits growth, and almost-as-good-as-Caterpillar 4.5% dividend yield at Cummins would probably win my vote. But Caterpillar?

While not exactly expensive, it just looks too risky in today's environment -- and Goldman Sachs is right to sell it.