Caterpillar's Stock Molts As Gold Bears Maul Market


Is this the big correction? Although the Dow Jones Industrial Average has ignored my warnings that the index has come too far, too fast and was due for a fall, yesterday's 266-point reversal -- its largest single-day loss this year -- could be the watershed event I've expected. The biggest loser on the day, however, was heavy-equipment maker Caterpillar , whose stock fell more than 3% as depressing economic news out of China weighed on its performance.

Caterpillar derives 70% of its revenues from outside the U.S., and it was counting on China to be a big part of its growth when it landed there with both feet in 2011. It became all the more critical when Europe slid into a double-dip recession, and now that the eurozone is threatening to break apart, China's first-quarter GDP comes in at an anemic 7.7% rate. Analysts were expecting 8%, though the 7.9% growth it recorded in the fourth quarter would have even been nice. Now it looks like the Orient Express is on the slow boat to China.

With the coal industry being swept into the dustbin and gold suffering some of its most severe losses in recent memory, the mining sector is broke. Yet as I said last week, that's the time you want to keep a close eye on stocks in such cyclical industries, and despite Caterpillar's sharp drop, it's why I maintain that it's one you'd want to have on your watchlist.

Clash of the titans
When bears are raging on the gold bullion market, it's not surprising to see gold stocks getting mauled as well. Golden Star Resources was the biggest loser in the sector, losing a quarter of its market cap on no company-specific news, though a report last Friday indicated that a large number of hedge funds had recently dumped their positions in the mid-tier miner. Yet it wasn't all that much better among the majors, either, as Barrick Gold fell almost 13% and Kinross Gold was down 14%.

While Barrick, the world's largest gold miner, has the additional worries of projects getting stalled, further pressure is mounting against precious metals, as the Chicago Mercantile Exchange raised margins yesterday 18%. Balancing that out, however, was welcome news out of the U.K. and (surprise!) the eurozone that inflation was no worse than expected, with a better-than-expected run from retailers, manufacturers, and services companies. It at least gives investors hope Great Britain doesn't fall into a triple-dip recession.

Though the bloodbath in gold is broad-based, I'm not certain it's not still a buying opportunity. After all, if all these people are selling, who's doing the buying? Whoever it is believes they're getting a really good deal on what ought to be a valuable commodity again in the future, and I'm not certain they're wrong. While I've largely exited most of my own stock positions having believed the fall was coming, one thing I continue to hold onto is precious metals.

Running out of steam
But the same global economic worries that weighed on Caterpillar also took down coal miner Walter Energy , whose stock tumbled almost 15% yesterday as it derives 80% of its revenues from international markets. The metallurgical coal producer is also in the midst of a proxy battle with one of its largest shareholders, Aubrey Capital, demanding dramatic change in the board of directors and running a slate of its own. It's a distraction the company doesn't need at the moment, though Aubrey contends it was management that brought it on itself.

Still, Institutional Shareholder Services, a proxy firm that weighs in on shareholder issues, recommends investors vote in favor of the current management team, and last week the miner said preliminary first-quarter results are looking better than fourth-quarter results did, as coking coal sales rose 9%.

Yet with coal consumption and production waning in the U.S., a number of high-profile miners are exiting the industry. Both Rio Tinto and BHP Billiton are selling coal assets to focus more on core operations. Because Walter has a global outlook, its fortunes will rise and fall with what happens in international markets, and there still look to be deep pockets of weakness. We might not have seen the end to its stock's fall.

Ready for a resurrection
Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in The Motley Fool's brand-new report. Just click here to access it now.

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