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June 12, 2014: 1:18 PM ET
Caterpillar does well when the economy is humming along. The stock has surged this year. That's great news.

Caterpillar does well when the global economy is humming along. The stock has surged this year. That's great news.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Stocks have pulled back a bit from their all-time highs lately.  It makes sense. The bull needs a rest. He needs to nap every now and then.

But there is one reason why I think that the rally still has some life to it. And it has more to do with an animal of the invertebrate variety than everyone's favorite mammalian mascot for a roaring stock market. Caterpillar.

Caterpillar (CAT) is the best-performing stock in the Dow Jones Industrial Average this year. It is up nearly 20%.

That is an encouraging sign. Why? Caterpillar is arguably the most cyclical stock in the Dow ... it has the most to gain and lose from when the economy is expanding or contracting.

The company's trademark yellow forklifts, bulldozers and excavators are staples at construction sites. Sales of construction equipment rose 20% in the first quarter. Strong demand for Caterpillar products means that stuff is getting built. Plain and simple.

Keep track of Caterpillar and the other 29 stocks in the Dow

Caterpillar also has a booming energy and transportation business ... making things like gas turbines, engines and diesel-electric locomotives. Revenue from that division was up 8% in the first quarter. Sales from this unit and the construction business account for nearly 80% of Caterpillar's overall revenue.

Also when I refer to "the economy," it's important to note that I mean the world's economy. Not just the United States.

Caterpillar generated nearly 60% of its total sales in the first quarter from outside North America.


Now I know what you're thinking. Isn't China going to have a hard landing? Isn't that bad news for Caterpillar ... and the global economy?

Sure, China's breakneck pace of growth is slowing. But as I've written before, the fears that China is the 2014 or 2015 version of Lehman Brothers appear to be overdone.

And Caterpillar's CEO has acknowledged that China is a risk. In a press release accompanying the first-quarter results, Doug Oberhelman said that China was an "example of both the potential and uncertainty" the company faces.

Oberhelman added that even though the Chinese "construction industry is facing challenges," he was also encouraged by how Chinese leaders are attempting to transition the economy to "a longer-term, more sustainable growth model."

Translation: It's okay that China won't be growing its gross domestic product at annual rates higher than 10% anymore. But China is still going to grow pretty rapidly. And that's good news for Caterpillar and multitudes of other American companies that are seeking to grow their business in the world's second-largest economy.

You may also ask yourself (where is that large automobile?) why Caterpillar is doing so well when the mining business is sort of a money pit right now. (I've always wanted to quote Talking Heads in a column. Although I probably have done so before. So this is not Once in a Lifetime I guess. You know what's coming next. Act crazy, David Byrne!)

Yes, it is a problem for Caterpillar that demand for mining equipment has taken a hit due to a pullback in commodity prices. Sales were down a staggering 37% from a year ago for Caterpillar's resource industries unit. But this business is the smallest of Caterpillar's three main equipment segments.

Here's the bottom line: The pop in Caterpillar's stock seems to be an indication that investors are betting on the global economy to keep getting better ... even if it is via painfully slow baby steps.

Look beyond 2014 and analysts are predicting even better times ahead for Caterpillar next year. Consensus Wall Street forecasts call for a 6% increase in sales in 2015 (compared to just a 1% rise this year) and a 15% jump in earnings per share ... nearly double the projected 7.6% increase this year.

It's looking equally promising for one of Caterpillar's key competitors.

Shares of Japanese construction equipment giant Komatsu (KMTUY) have done extremely well this year, holding up nicely while the Nikkei has taken a bit of an Abenomics hangover tumble. (Caterpillar and Komatsu could be the two top holdings in a Bob the Builder ETF. Can we invest in it? Yes, we can!)

Analysts are also expecting that Komatsu will report better sales and earnings in its next fiscal year than in this one.

And as anyone who follows the stock market closely knows, investors are all about looking forward -- not backward.

So if Wall Street is envisioning a 2015 where companies are spending more on big construction equipment, that's undeniably good news for the global economy. More building and manufacturing should lead to more consistent jobs growth. And that's what we desperately need to see in Europe, Japan, China ... and of course, here at home.

Reader Comment of the Week ... and what happens on Sunday? RadioShack (RSH) was the butt of many Twitter jokes this week following its disastrous earnings report and a price target cut by a Wall Street analyst to $0.

But one of my followers has an idea for how the company can resurrect itself. Just sit right back and read this tweet, a tweet of a stock's fateful trip.

Very well-played. Not sure if you have kids. Or for that matter if you are a male Oracle or female Oracle. But if you're a dude with offspring ... I'd like to paraphrase the immortal words of the late baseball Hall of Famer Ralph Kiner. It's Father's Day ... so happy birthday!

I am looking forward to my fifth such celebration ... and first with Baby Buzz! I already know that older brother Buzz, Jr. is going to love this column thanks to all the Caterpillar references. CAT has some pretty cool toys. Although not as cool as John Deere (DE)!

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Paul Lamonica
Paul R. La Monica
Assistant Managing Editor, CNNMoney

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.

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