Caterpillar (NYSE: CAT) Continues To Plough Ahead

A small but mighty 0.5% move to the north on Wednesday was enough to make shares of construction giant Caterpillar (NYSE: CAT) one of the better performers in the Dow Jones Industrial Index. It was a session that started well as hopes continue to grow on a COVID-19 vaccine soon being available but an ugly reversal that started lunchtime had most stocks close at their lows of the day.

Caterpillar bulls will be happy that their shares managed to eke out a gain for the day and will be hoping this is indicative of the growing momentum that has shares trading at all time highs. With the stock now looking likely to close out November with its eighth month of gains in a row and with December likely to mirror it, investors would be forgiven for thinking that 2020 was always going to finish like this.

Strong Resilience

But we need only to stretch out the chart to see how precarious the bull’s position was at the start of the year. The stock had been in a near-continuous retreat from its previous all time high set in early 2018 before it popped up last Christmas before that was cruelly put down by the onset of the COVID-19 pandemic. As economies and therefore construction projects shuddered to a halt Caterpillar was on the front like, and within a few weeks shares were down 40% and back at 2011 levels.

The thing is though, their quarterly numbers in recent months don’t strike one as being all that impressive, certainly not enough to justify the current all-time highs by themselves. Sure, their Q3 earnings at the end of October came in ahead of analyst expectations but revenue was still down more than 20% year on year and management didn’t feel confident enough to offer any forward guidance. As recently as last week, it was reported that their rolling three month retail machine sales were still down 17%, marginally better than the 20% fall since in September but still nothing to be getting excited about.

So where has the strength seen in their share price come from? It seems plenty of potential around upcoming economic expansion has been baked into shares as economies continue to recover from COVID quicker than expected and a commercially accessible vaccine continues to move closer to the shelves. Macro-economic factors are also playing a role, particularly these record low-interest rates we’re living with. Few things spur construction development more than cheap money, and home building has continued to perform well this year despite the pandemic.

Key Factors To The Upside

Lower rates are also helping to weaken the dollar, and for a company like Caterpillar that sees a large portion of its revenue come from overseas, this will make their products more attractive to international buyers. Even in China, despite it being the epicenter of the COVID pandemic, Caterpillar are expecting industry-wide construction demand to increase on the year as a whole, coronavirus be damned.

On top of this, since this month’s election we’re continuing to see a broader sector rotation as the NASDAQ index and tech begin to give way to the Dow index and industrials. Over the past fortnight the former is up 1% to the latter’s 5%, a clear sign that the big money is starting to move towards a defensive portfolio, with yesterday’s strength confirming Caterpillar’s position as a textbook cyclical stock.

So while the internal numbers mightn’t be quite there yet, all the signs point to the more important fundamental factors starting to align, which we can then expect to filter through to upcoming earnings reports in the year ahead.