Tuesday, May 20, 2014

Time to Buy Caterpillar and Joy Global?

The relative outperformance of Caterpillar  and Joy Global  in 2014 could easily lead Fools to conclude that the mining sector is making a comeback after a couple of years in the doldrums. Is this the case, or are their stock-specific reasons why these two companies have outperformed?

Caterpillar and Joy Global outperform
Going into 2014, the financial markets were fretting about the potential for emerging market weakness. Not only had a slew of companies reported growth that was less than expected in the BRICs, but fears over the shadow banking system in China, and subsequent defaults, have been at the forefront of concerns. It's usually true to say that if emerging markets catch a cold, then mining and commodities will start sneezing. Moreover, China's torrid pace of capital investment was bound to slow at some time, taking demand for certain hard commodities down with it.

These fears get expressed in the stock prices of mining capital-machinery companies, like Caterpillar and Joy Global. If conditions turn out to be not as bad as expected, then the stocks can see some upside, thanks to value hunters and "relief-rally" buyers coming in.