Monday, September 9, 2013

Caterpillar Gains 3% on China Optimism, Leads Dow Higher

Is Caterpillar (CAT) really in the Dow? The beaten down industrial stock has gained 3.1% to $89.95 today, more than one percentage point more than Alcoa (AA), the next biggest winner with a 1.9% gain. The Travelers Companies (TRV) has gained 1.9% to $81.99, and 3M (MMM) has climbed 1.5% to $116.78. The Dow Jones Industrial Average has risen 0.9%.

To put Caterpillar’s gain in perspective, its the stock’s largest jump since May 3, when it rose 3.2%. And with time still remaining today, it could advance even higher.

We’ll chalk the big move up to the better economic news out of China last night, as well as sentiment that the global economy is picking up steam. The Caterpillar is also an industrial stock, and those are pretty popular right now.

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I wouldn’t make too much of the move just yet, however. For starters, Caterpillar has been stuck in a range since March, as the following chart shows:

And, as Morgan Stanley reminded investors last week, the market might be expecting too much from Caterpillar. On Sept 5, analyst Nicole DeBlase and team wrote:

While we agree that Mining destocking activity should cease, we see risk to Construction restocking based on our survey work – 41% of both US and China Construction dealers still think inventory is too high, and plan to reduce throughout the remainder of 2013e. Should Construction activity not pick up materially in early 2014e, we see the potential for this to remain a headwind next year – but we do still give CAT credit for 5ppts of top-line Construction benefit from restock in 2014e. We are more bearish on Mining CapEx as we do not expect the second derivative of cuts to turn positive until 2016e.

Mogran Stanley initiated the stock as an Equal Weight with an $89 price target.

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