The companies that should benefit the most from the macroeconomic trends that will be driving stock market performance in 2022 derive most of their income from infrastructure, commodities, and banking (financials), explains Jim Pearce, chief investment strategist of Investing Daily's flagship newsletter, Personal Finance.
It stands to reason that my Top Pick for 2022 is involved in all three of those sector. That company is heavy equipment manufacturer Caterpillar (CAT), which divides its sales operations into three sector segments: Construction Industries, Resource Industries, and Energy & Transportation.
Its Construction Industries segment should be a direct beneficiary of the recently enacted $1 trillion infrastructure spending bill. During the third quarter of 2021, Construction Industries was Caterpillar’s biggest revenue generator at $5.3 billion in total sales.
Caterpillar’s Energy & Transportation segment contributed $5.1 billion in sales, with Resource Industries (mining) chipping in another $2.4 billion. To a certain degree, the transportation half of that segment should also benefit from infrastructure spending, although federal spending on the type of railroad and marine terminal projects that benefit Caterpillar may not materialize right away.
Lesser known is Caterpillar’s Financial Products division, which provides loans and leases for the equipment it sells. It contributed only $762 million in sales and $173 million in profit during the third quarter, but I believe both of those numbers could increase substantially in 2022.
A lot of construction companies will need to upgrade their production capabilities to compete for the most desirable infrastructure projects that will be awarded over the next four years, and obtaining financing from Caterpillar will be the quickest way to do that.
In addition to the big hike in infrastructure spending, Caterpillar sells to other industries that could see an influx of money that should result in higher sales revenue and wider operating margins for the company.
Rising commodity prices, especially for industrial metals, would directly benefit Caterpillar’s Resource Industries segment. The doubling of oil prices during the past year will induce many drillers to reopen capped wells and explore for new reserves, thereby increasing demand for Caterpillar’s energy construction products.
Thus far, the full extent of that upside potential is not reflected in Caterpillar’s share price. After reaching an all-time high above $246 in early June, CAT gradually receded over the summer and fell below $200 by late September.
Since then, it has traded in a narrow range is poised to breakout to the upside. At a share price of $200, CAT is valued at less than 22 times trailing earnings compared to a multiple of 29 for the S&P 500 Index.
Under normal conditions, an industrial company such as Caterpillar should trade at a discount to the overall market. But these are not normal conditions, and in 2022 Caterpillar could post sales and earnings growth numbers far better than the index average if the macroeconomic trends cited above remain in place.
A Look Back at 2021's Top Performers
Last year, Jim Pearce chose Blackberry (BB) as his Top Pick; the stock rose 48% in 2021. Here's his latest update:
During its latest quarter, cybersecurity revenue accounted for roughly 70% of BlackBerry’s total revenue. Another 23% came from IoT (Internet of Things) sales with only 7% derived from licensing agreements including its smartphone technology.
BlackBerry tends to fly below the radar of Wall Street. Only 7 of the 16 analysts that follow the company have provided estimates for the company’s sales and earnings in 2022. That lack of interest in BlackBerry creates a temporary buying opportunity. It may take a few more quarters of improving performance for the company to get Wall Street’s attention, but until then BlackBerry remains a buy up $16.