Caterpillar (NYSE:CAT) stock has been on the receiving end of a nasty sell-off that has dragged it down 20% from its May 2021 peak.
The manufacturer of heavy-duty machinery was overdue for a pullback after its incredible rally out of its 2020 lows. Yet, the selling pressure has likely become overblown with the Evergrande (EGRNF) situation that put the crosshairs on China-reliant companies like Caterpillar.
As such, I am bullish on CAT stock amid its latest move further into bear market territory. (See CAT stock charts on TipRanks)
Market Turns on Cyclical Stocks
Increased infrastructure spending, and the early stages of a new market cycle have been meaningful tailwinds for Caterpillar. With concerns about slowing growth in a midcycle transition though, CAT stock is at risk of picking up negative momentum.
An inevitable early-to-mid-cycle transition has likely already weighed on the name. Add recent Evergrande fears into the equation, and it's not a mystery as to why the construction equipment maker has suddenly become one of the market's most unloved stocks.
Long-Term Fundamentals Intact
Despite the jitters and pessimism, there are still some pretty strong longer-term tailwinds that are likely to overpower any newly discovered headwinds over the next several years.
Most notably, President Joe Biden's push to increase infrastructure spending is also likely to bring forth higher demand for a wide range of Caterpillar equipment. Despite Evergrande contagion woes, China remains a key long-term growth driver that could sustain double-digit percentage revenue growth for many years to come.
Despite such meaningful long-term catalysts, potential negative surprises could continue to hold Caterpillar stock below $200 over the foreseeable future. While untimely, the fast-falling knife may be worth catching for those with long-term mindsets.
Wall Street's Take
According to TipRanks' analyst rating consensus, CAT stock comes in as a Moderate Buy. Out of nine analyst ratings, there are six Buys, two Holds, and one Sell.
The average CAT price target is $241.33, representing 22.7% upside potential. Analyst price targets range from a low of $172 per share, to a high of $270 per share.
Bottom Line
While the full impact of Evergrande's potential default may not be fully understood at this time, analysts may need to re-evaluate its potential effect on Caterpillar. That said, investors shouldn't expect the impact to be as catastrophic to the company as the initial reaction implied.
At the end of the day, Caterpillar is at the top of its industry, and is in a great spot to continue benefiting from increased infrastructure spending, and mining in developed and emerging markets.
Add the wild card of innovation (think the extremely long-term potential in autonomy and carbon capture), and CAT stock looks very tempting, even though the bottom may still be a ways away.
Disclosure: Joey Frenette doesn't own shares of any mentioned companies at the time of publication.
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