The Dow Jones Industrial Average is at record highs and it's mostly because of just one of its components.
Caterpillar is doing a lot of heavy lifting when it comes to moving the Dow index, a huge change from last year when it was up just 1 measly percent against the Dow's 26 percent gain.
Though it's just 4 percent of the entire average, the equipment maker is up nearly 17 percent this year. To put it in perspective, Caterpillar accounts for more than half of the entire Dow's gains. And, were it not for Caterpillar, Merck and Disney, the Dow would be down in 2014.
Just because Caterpillar plays well in its hometown of Peoria, Illinois, doesn't mean the stock is a play on the domestic economy. In fact, Caterpillar's international sales are responsible for 61 percent of its business. That was a huge problem for Caterpillar last year.
In 2013, Caterpillar's sales dropped 15.5 percent to $55.7 billion compared to 2012. Every region saw a decline in sales, but half of its sales losses were from Asia/Pacific and Latin America. Still, Cat's sales to those two regions have tripled over the past decade. Combined, Asia/Pacific and Latin America are now responsible for a third of the company's revenues.
Does that mean this year's gain in Caterpillar's stock is a sign that the market thinks the world's economy will improve? Not necessarily, says David Seaburg, head of sales trading at Cowen and Company. He sees Caterpillar's stock performance has less to do with the market's outlook for the global growth and more to do with dealer inventories.
Last year, "dealers took inventories down dramatically," Seaburg said. "They didn't have a lot of big orders coming in. This year, obviously, they had to replace those inventories."
Seaburg is not "superbly bullish" on Caterpillar's stock. "I think they benefited this year from a lot of different variables that are much more Cat-specific versus the overall economy," he said.
Richard Ross, global technical strategist at Auerbach Grayson, says the technicals on Caterpillar shares are a bit more bullish. His charts show the stock breaking out from a bullish base that started early last year. In the past six months, Caterpillar's shares have gained 25 percent. Ross sees it as settling into a wedge pattern about two months ago, only to recently break out on the upside.
"This is a real comeback story here," said Ross, a "Talking Numbers" contributor. "It's got a lot of momentum."
Unlike Seaburg, Ross sees Caterpillar as a potential proxy to global growth or, at least emerging market growth.
"If you believe in that global growth story," Ross said, "the chart of Caterpillar certainly supports that contention. I would still be a buyer here. … There could be another 10 bucks left to this stock."
To see the full discussion on Caterpillar, with Ross on the technicals and Seaburg on the fundamentals, see the above video.