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International Business Machines Corp. (IBM), Caterpillar Inc. (CAT), Alcoa Inc (AA): Three Dow Laggards of 2013

International Business Machines Corp. (NYSE:IBM)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.

International Business Machines Corp. (NYSE: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 Corporation (NASDAQ:ORCL) and others.

Looking ahead, I believe International Business Machines Corp. (NYSE: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.

International Business Machines Corp. (NYSE: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 Inc. (NYSE:CAT) — 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 Inc. (NYSE:CAT). 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.

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