If the economy is so terrible, why are machinery stocks relatively strong?

Oddly enough on a day, August 31, when investors are again feeling nervous about growth, machinery stocks are showing relative strength. Among the standouts Caterpillar (CAT), Joy Global (JOYG), Bucyrus (BUCY), and Deere (DE).

This group has been through a day much like this not so long ago. On August 12 the same stocks were up—with the exception of Caterpillar, which was down slightly. Caterpillar  (CAT) was the catalyst for the strong showing that day by the sector. On the morning of August 12 the company announced that it would triple the production capacity of its U.S. excavator lines and add 500 more employees with the opening of a few plant in Texas. Caterpillar said that plant will be operation in mid-2012.

Now, of course, Caterpillar’s optimism about its business may be completely misguided or wildly early, but it echoes news from other machinery companies: If your customers are other companies with long-lead times between breaking ground on a mine or an airport or a communications network and having them go into use, then you’re actually seeing an increase in business. That’s been the story at a company such as Cummins (CMI) and at Intel (INTC).

Today, August 31, the catalyst looks to be earnings from Joy Global due before the open tomorrow. The thinking among analysts is the company will beat modest expectations for the current quarter and then predict strength for the fourth quarter, which is typically the strongest of the year.

One stock that isn’t in today’s list of leaders but that will be a major beneficiary of this trend is Komatsu (KMTUY.PK), the world’s second largest construction-equipment maker. Read more