3 Dow Laggards of 2013

3 Dow Laggards of 2013

This year the Dow Jones Industrial Average has been a steady climber, reaching new all-time closing and intraday trading highs. The index is up 17.92% since the beginning of the year. However, not all components of the index have experienced this upward price momentum. Here is a look at the bottom three companies that have been holding back the Dow so far this year, why they have been struggling, and where they may be heading.

IBM -- Year-to-date return: 1.2%
IBM has fluctuated considerably over 2013. Expectations for the first quarter proved to be overstated when the company reported a rare earnings miss. Revenue and EPS both fell short of consensus estimates. Among other challenges, IBM cited weakness in the yen and an inability to close certain software deals before the quarter ended. IBM was also plagued by industrywide decline in hardware sales and competition from Oracle and others.

Looking ahead, I believe IBM has the best opportunity of these three Dow laggards to catch up with the index. Several analysts have cut their price targets on IBM, but the company is in a position to outperform its hardware-oriented counterparts because it derives more than half of its revenue from its services division and has a strong stream of software-licensing revenue.

IBM has stuck with its original EPS guidance of $16.70 for the year. If it can get back on track and meet its quarterly goals (IBM announces second-quarter numbers today after markets close) and finish the year strong, then I think it has a chance to make up some of its lost ground.

Caterpillar -- YTD return: -1.62%
Heavy-equipment manufacturer Caterpillar has had its performance hampered by a hefty decline in overseas demand for its products coupled with falling commodity prices. Falling commodity prices mean tighter margins for mining companies who lose the capital to reinvest in new equipment from Caterpillar. As a result, Caterpillar's mining segment saw a 23% decline in sales in the first quarter. Construction spending has not increased enough to make up for losses incurred in the mining segment. Cost-cutting efforts and layoffs have been implemented to try to salvage some of the bottom line. All of the above has contributed to a lackluster stock performance since the year began.

Some opportunity exists for Caterpillar. America appears to be on the outset of a housing shortage as demand for housing far outpaces the available supply. Prices are rising, and supply is falling, indicating that an influx of new-home construction will be needed to keep pace with demand. Demand for heavy equipment is rising in South America, especially in Brazil, which is preparing for the summer Olympics and World Cup. In the near term, I'm not convinced these opportunities will be enough to counter the economic headwinds outlined above. I expect general underperformance for the next six to 12 months.

Alcoa -- YTD return: -6.57%
Alcoa, the global leader in aluminum production, has been by far the worst-performing stock in the Dow year to date. Falling commodities prices are a big threat to the company: Aluminum spot prices are down more than 15% since January, creating serious concerns about Alcoa's ability to grow its revenue. Alcoa's credit was also downgraded by Moody's to junk status back in May. Moody's cited pressures from within the aluminum industry and from falling prices.

To counter the issues facing its bottom line, Alcoa has initiated a serious cost-control effort with a goal of cutting $750 million by the end of 2013. It is this move that seems to be keeping Alcoa from ending up like its competitors Rio Tinto and Aluminum Corp of China, which are down 29% and 34%, respectively, year to date.

The outlook for aluminum is bleak, with little indication of when global demand for the metal will turn around. Alcoa faces a large degree of uncertainty and unfavorable conditions through the rest of 2013. These ongoing concerns have manifested themselves in Alcoa's poor performance as of late.

The market has not been kind to these three companies so far in 2013, and their poor performances have held the Dow back. Moving forward, keep an eye out for economic indicators like commodity prices, housing starts, and exchange rates on the yen to give you an idea of when these companies may start turning things around.

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The article 3 Dow Laggards of 2013 originally appeared on Fool.com.

Raymond Boisvert has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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