When inflation rears its head, the first thing analysts do is rush to buy Caterpillar (NYSE:CAT).

Caterpillar makes big trucks, excavators, and other industrial machines. Inflation makes the things its machines move more valuable, so companies buy more those machines. Analysts recommend CAT stock. That’s how it’s supposed to work.

Sure enough, just since the start of 2021, CAT is up almost 7%. Over the last six months CAT investors have seen an increase nearly twice that of the average S&P 500 index stock. Caterpillar shares are up 42% versus a 25% gain in the gauge.

This is not yet reflected in the company’s business. For the third quarter, Caterpillar delivered earnings of just $1.22 a share on sales of $9.9 billion. The comparable figures for 2019 were $2.66 a share and $12.8 billion.

Caterpillar next reports on Jan. 29 , with earnings of $1.45 per share and revenue of $11.18 billion being the numbers to beat.

Why the Optimism for CAT Stock

Despite the pandemic, Caterpillar’s dividend of $1.03 a share was maintained. That’s a yield of about 2.1%. If that sounds skimpy, the dividend was just 77 cents five years ago. A rising dividend and rising stock price compensate for a low yield. Over that five-year period, CAT is up 224%. That’s better than Facebook (NASDAQ:FB).

Investors who stayed with Caterpillar through the pandemic have prospered. Barron’s writer Al Root says they will prosper even more this year. Caterpillar shares have been leading the early-year rally as analysts expect the global economy to pick up steam, as China’s did after its lockdown ended.

There’s more than just optimism at work here. Buying the oil and gas division of Weir Group, for $405 million in cash looks smart in the near term. Oil prices have been strong lately and should remain strong until renewable energy supplies increase. Global growth is the cherry on top.

While Caterpillar’s vehicles are still gasoline-powered, because of their size, they can still improve by being autonomous. At the virtual CES, Caterpillar showed a new line of autonomous mining vehicles, backed by $2 billion of investment and more than 16,000 patents.

Still, Some Caution Advised

There are reasons to expect a short-term pullback, however. Some are contained in the optimists’ calls.

The Barron’s story, for instance, tells investors to buy CAT when its price-to-earnings ratio is low, and sell when its P/E is high. With the buying well ahead of the recovery, the P/E is 32 on a market cap of about $106 billion.

Let’s assume that 2020 was a one-off, however. In 2019 Caterpillar earned $10.74 per share. A return to that 2019 level puts that P/E at just 18.1, which is well below the market’s average multiple of 25.3.

The average analyst also isn’t out ahead of their skis. Tipranks has CAT as just a moderate buy, with four of 10 analysts saying to buy the stock and one saying sell it. Their average one-year price target of $185 is more than 4% below where it was trading on Jan. 19.

Stable in the Long-Term

Caterpillar is a very stable long-term investment.

For those in retirement, or nearing it, CAT stock offers a dividend as well as capital gains. It’s one of those stocks you should look to accumulate starting at age 55, and then stay in.

Right now, it looks expensive. The short-term optimism looks overdone. But if you’re willing to let time work for you, there’s never a bad time to own a good company.

Management’s move to Chicago didn’t make Caterpillar abandon its long-time home of Peoria. Its building there, over the Illinois River, overlooking I-74 and Upper Peoria Lake, still dominates the skyline. As it will for years to come.

At the time of publication, Dana Blankenhorn owned no shares in companies mentioned in this story.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.