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Best, Worst of 2013: Northrop Grumman vs Caterpillar

Stocks in this article: SPY XLI NOC GD LMT ITA CAT

However, not all industrial stocks performed as expected in 2013. One of the most reliable stocks ever for going up more in a bull market and down more in a bear market is Caterpillar, which is actually down 4.8% for the year. CAT's 41% lag behind XLI is its second-worse, one-year relative performance since XLI started trading in 1998. But it should be noted that since XLI's inception CAT has more than doubled XLI's returns.

The big driver behind CAT's struggles this year has been its perceived reliance on China and other emerging markets. For years, China has been modernizing its cities and infrastructure, which requires natural resources and big equipment to move those resources.

As China's economy has struggled to maintain its torrid growth rate in the last couple of years, its demand for resources has slowed -- which means fewer pieces of yellow Caterpillar equipment being purchased. Hence there has been a long string of negative earnings and revenue surprises. Going forward, both earnings and revenues are only expected to grow by single digits in 2014.

The slowdown in China is a major contributing factor to the bearish case for CAT. Last summer, well regarded short-seller Jim Chanos presented his thesis for shorting CAT based on the China slowdown during the Delivering Alpha Conference.

Coming off of the March 2009 low, CAT rallied 205% in two years, well ahead of XLI and NOC because it still benefited from the China effect and an oversold bounce in the broad U.S. equity market. There are still plenty of emerging and frontier countries that over the course of the next 10 years will need to modernize their infrastructures similar to the way China has even if on a smaller scale, like most of Latin America, Africa and smaller Asian countries, and as that happens Caterpillar will benefit and its stock price could put in a repeat performance of 2009-2011.

For now, though, CAT would seem to have nothing going for it right now. It is in the wrong business relying on the wrong country but that could make it a good contrarian investment for a patient investor.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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