Just as there are some stocks out there that are cheap for good reasons, there are stocks that carry well-earned premiums, and Cummins (CMI) is one of them. While this is certainly a cyclical business, few companies in the heavy machinery space (and perhaps few cyclical companies in general) do a better job of adjusting the cost structure to capture the upside in the good times and limit the downside in the bad times.
I had hoped back in May that there’d be a pullback after the machinery sector rallied, but that never happened and now these shares are another 20%-plus higher. Not only has Cummins continued to outperform industrials in general, but also heavy machinery peers like Caterpillar (CAT), Navistar (NAV), and PACCAR (PCAR), though Deere (DE) has done even better. If I owned Cummins, I probably wouldn’t be in a hurry to sell (I might consider protective stops), but it’s tougher to make the case for buying in now, as I think the shares already price in a healthy cyclical recovery and expectations may have more downside than upside risk at this point.
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