If there’s one thing I’ve learned over the years it’s that you can just as easily generate the same return on a stock no matter what market sector or market capitalization of the underlying business. The key to successful equity investing is always picking the right stock at the right time. The vast majority of investors aren’t patient enough to wait for the market to provide attractive entry points. Most investors just buy stocks when they come into some money.
Since the stock market low set in March 2009, the performances of large-caps and the main stock market indices have been excellent. Buying at the market low (in hindsight) would have been a tremendous moneymaker—even just owning a large-cap index. If there’s one company that illustrates the power of large-cap wealth creation, it is Caterpillar Inc. (NYSE/CAT). Caterpillar manufactures and sells earth-moving and mining equipment all over the globe. This is a business that’s worth paying attention to—even if you don’t want to own it as a shareholder.
Caterpillar is one very well managed company. It’s a benchmark business with a long track record of operational success and wealth creation. It’s about as good an indicator on the global economy as you can find.
Caterpillar has been padding its bottom line recently by selling a lot of heavy equipment in Asia; in China, in particular. The company started its presence in China many years ago and it now has the distribution network throughout the country to sell a lot of equipment and parts in an economy that’s desperate for new infrastructure. In addition, Caterpillar caught the commodity price cycle correctly with most precious metal producers sitting on huge cash hoards. The combination of the BRIC emerging markets (Brazil, Russia, India and China) with record prices for precious metals is a backdrop for a business with excellent prospects for earnings growth over the next decade.
This large-cap Dow stock is up about 350% since the March low in 2009. From the early 1990s to just before the financial crisis, Caterpillar’s share price appreciated approximately 1,500%, accounting for stock splits. All this, while also paying a dividend to shareholders.
One could argue that this outstanding wealth creation from a large-cap company was in fact due entirely to the economic boom in China and India. If you believe like I do that this boom is going to continue for years to come, a stock like Caterpillar’s seems awfully attractive when it’s down.
In its first quarter of 2001, the company beat consensus estimates and Street analysts have been increasing their earnings per share forecasts for the remaining quarters this year and all of 2012. If you want to do yourself a favor, read the company’s second-quarter earnings statement when it comes out. It will be one of the most valuable research reports you can read on the global economy.