Three Dow Companies With Plenty of Upside Room: International Business Machines Corp. (IBM), The Walt Disney Company (DIS), Caterpillar Inc. (CAT)

Building a Recovery

Caterpillar Inc. (NYSE:CAT) operates in a very cyclical industry, which means that investors have been getting concerned about the effects of a weak global economy on the company’s performance. The commodities and mining segment has been showing weakness over the last quarters, and Caterpillar’s management has admitted that the business is facing considerable uncertainties when it comes to global demand in the middle term.

In fact, earnings guidance for 2013 consists of an unusually wide range of between $7 and $9 per share, which reflects the degree of uncertainty surrounding the company. The good news for Caterpillar Inc. (NYSE:CAT) investors is that even under a pessimistic assumption of $7 per share, the current price of the stock under $90 would yield a P/E below of 13, so a negative scenario seems to be pretty much priced in.

Looking at the positive side of the company’s prospects: Caterpillar has an undisputed leadership position in the US construction business, a segment with enormous upside potential in the middle and long term considering that it seems to have already turned the corner, but still well below historical average levels for the industry. If, or when, building comes back to life, Caterpillar Inc. (NYSE:CAT) will one of the prime beneficiaries from that recovery.

Bottom Line

What should an investor do when the market is making new highs? Is it better to wait for a pullback or to buy before prices get more expensive? There is no easy way to answer that question with certainty, since trying to time the market rarely pays off.

Fortunately, there is a better alternative: buying high quality companies at convenient prices with a long term horizon. When a business does well over the long term, investors get rewarded for they patience, so analyzing individual companies is much more productive than paying too much attention to the indexes. Even with the Dow Jones at historical highs, I think these three Dow companies have plenty of room to continue running higher over the next years.

The article Three Dow Companies With Plenty of Upside Room originally appeared on Fool.com and is written by Andrés Cardenal.

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