Construction machinery stocks have trailed the S&P 500 by about 20% over the past year amid challenging circumstances brought about by the U.S.-China trade war and unfavorable farming conditions. Despite these macro headwinds, data from Statista shows the global construction equipment market reaching $90 billion this year – up from $70 billion in 2016. Moreover, analysis from the same market research portal forecasts U.S. construction spending to grow from $1.30 trillion in 2019 to $1.45 trillion by 2023.
The embattled construction machinery group would also benefit from an increase in government infrastructure spending. On that front, U.S. House Democrats last month proposed a $760 billion infrastructure spending bill over five years that aims to rebuild roads and bridges as well as curb carbon pollution. The proposal, at the very least, paves the way for congressional debate.
From a technical standpoint, the three construction machinery stocks outlined below found buyers at crucial support levels in Tuesday's session. Let's explore possible trading tactics.
Caterpillar Inc. (CAT)
With a market capitalization of $73.79 billion, Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, engines, and industrial turbines. The company, which controls about 17% of the global heavy equipment market share, expects continued global economic uncertainty to weigh on sales this year. However, the heavy machinery maker's focus on strategic investments, cost efficiencies, growing services, and product offerings should continue to drive growth. Wall Street has a 12-month consensus price target on the stock at $147 – 10% above Tuesday's $133.51 close. As of Feb. 5, 2020, Caterpillar shares offer an enticing 3.17% dividend yield and have gained 5% over the past year.
Caterpillar stock continued to sell off in January after the company delivered its cautious 2020 outlook. More recently, buyers returned to the stock at the $132.50 level, where price finds a confluence of support from the September swing high and 200-day simple moving average (SMA). Swing traders who enter here should aim to book profits on a test of key resistance at $147.50 while managing downside with a stop-loss order placed underneath the Feb. 3 low at $129.30.
Deere & Company (DE)
Deere & Company (DE) makes and distributes a variety of heavy machinery equipment, operating through three business divisions: agriculture and turf, construction and forestry, and financial services. The company's higher-margin precision agriculture sales should continue adding value as farmers upgrade their fleets in the coming years. Analysts expect the $51.76 billion tractor maker to disclose first quarter fiscal earnings per share (EPS) of $1.30, down from the reported year-ago figure of $1.54. Although Deere stock trades down 5.10% year to date, it has outperformed the farm and heavy construction machinery industry average by 1.43% as of Feb. 5, 2020. Investors receive a 1.92% dividend yield.
After falling below the 200-day SMA last week, Deere shares rallied above this closely watched indicator and a multi-month trendline in Tuesday's trading session. Despite yesterday's strength, the relative strength index (RSI) shows a reading below 50, giving price ample room to move higher before consolidating. Those who take a trade should set a profit target near the top trendline of a descending channel at $175. Cut losses if the stock reverses below the psychological $160 round number.
The Manitowoc Company, Inc. (MTW)
Milwaukee-based The Manitowoc Company, Inc. (MTW) provides lifting equipment for the construction industry. Analysts forecast the 118-year-old crane company to post fourth quarter adjusted EPS of 28 cents on revenues of $493.5 million when it reports after the closing bell on Thursday, Feb. 6. Wall Street expects the firm's performing aftermarket business to help offset margin pressure caused by currency fluctuations affecting its European-manufactured cranes. Investment bank Goldman Sachs upgraded its rating on Manitowoc stock in November to "buy" from "sell," saying that the $528.48 million company stands to benefit from rationalized supply in the construction equipment channel. As of Feb. 5, 2020, Manitowoc stock has slumped almost 13% so far this year.
An eight-month inverse head and shoulders pattern appears to be forming on the Manitowoc stock chart. Furthermore, the 50-day SMA crossed above the 200-day SMA late last year to generate a "golden cross" buy signal. Active traders who buy the stock should anticipate a move back up to the bottoming pattern's neckline at around $17.50. Consider placing a stop order somewhere between $14 and $14.50 to protect capital.