It's been the worst performing Dow stock this year. But, could Caterpillar be a winner in 2014?
There are the Dogs of the Dow. And then, there's Caterpillar.
While the rest of the Dow Jones Industrial Average is at record levels, the Illinois-based construction and mining equipment-maker is down 7.5% for the year as of last Friday. The index was about 20 points lower than it would otherwise be due to Caterpillar's down year.
Yet one group of analysts isn't giving up on Caterpillar. In their most recent note, Bank of America Merrill Lynch (BAML) upgraded their ratings on the company to a "buy" from "neutral" and also raised their price target to $100.
Until this week, BAML had been neutral on the stock since reinstating coverage a year ago. News of the upgrade helped to send shares of Caterpillar up 2.5% to $84.94 within the first hour of trading Monday.
The most recent quarter was a rough one for the company. Sales were down 18.4% to $13.4 billion compared to the same quarter in 2012 while net income was 44% to 946 million.
What's hurting Caterpillar is, in part, weaker metals prices, notes John Stephenson, portfolio manager at First Asset Investment Management.
"This is a company that just hasn't recognized that the resource industry has really peaked and the [capital expenditures] spend is on the downslope," says Stephenson. Even on the Caterpillar's infrastructure sales, Stephenson believes there's not much there for investors to be hopeful.
"This is the third consecutive quarter where they've been guiding down," says Stephenson. "It's really looking pretty dismal from management's own expectations going into next year."
However, the technicals may give a little bit of optimism for the stock, at least in the short-term, according to Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson.
"The story's not great. The chart's not great," says Ross. "But, there's a reason why the so-called 'Dogs of the Dow' strategy works – investing in the ones that have lagged. [That's] because in the next year, they tends to lead."
Ross sees the stock as trading with in a well-defined range but it's now testing key levels. Yet while the short-term may be promising, the long-term trend isn't, according to Ross.
"For the time being, you want to hold it," says Ross. "Maybe it's a trading buy, but don't get too aggressive here because the pattern remains bearish."
To see the rest of the Stephenson's fundamental analysis and Ross' technical analysis – with his key trading levels – watch the video above.
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