Finding Caterpillar’s Tell Could Lead to Astronomical Profits

The story on Wall Street that's got everyone worked up one way or the other is the recent profits at Goldman Sacs and Bank of America. Some are pleased and view this as a telltale sign of a recovery. They look at these banks profits and argue that TARP is working.

Others view this recent quarter's profits as outrageous. This group sees the greed and misuse of government funds to prop share prices and executive compensation at the banks.

While this debate enters its frenzy stage, another story is developing slightly below the radar. Surprisingly, no one seems to be talking about another earnings announcement at one of the most important companies in the U.S.: Caterpillar.

CAT announced a second-quarter profit of 60 cents per share. Analysts expected just 22 cents per share ― just a third of what the company actually produced. Of course, 60 cents is miniscule compared to just last year. The company's Q2 2008 EPS was $1.74. But you need to look at the wider view…

Caterpillar is the crown jewel of American industry. It represents the engine of the blue-collar world ― at least in the U.S. CAT makes everything from bulldozers ― needed for nearly every road and construction project in the country ― to turbines ― needed to keep the lights on in the U.S.

The company's customer base reaches from Canada to Indonesia…from China to Chile. There's almost no developed or even developing country in the world that doesn't show Caterpillar some business.

So what does this quarter's profits mean for CAT, the U.S., and the rest of the world? It means, that either the stimulus plans worldwide are starting to work or we are turning a corning on this recession…or both.

We're not calling for the recovery to start now, and we certainly aren't calling for the bottom of the market. But we are pointing out the number one indicator. We'll know when the economy is back on track, when Caterpillar starts performing like years past.

For us small-cap investors, profiting from CAT's story is even easier. You see, CAT may be the world's largest industrial machine manufacturer. But it's not the only one. There are plenty of smaller, but just as lucrative, companies that make plenty of money in this field.

The first one that you should keep an eye on is Manitowoc Co. (NYSE: MTW). Until this recession, Manitowoc was on a very impressive pace. The company, which also manufactures machinery like lifts and cranes, brought in nearly $66 million in 2005, $166 million in 2006, and a whopping $337 million in 2007.

Then the economy went sour. Projects were locked up because of funding. Customers quit building ― therefore eliminating the need for Manitowoc's products. Shares fell from almost $50 at the end of 2007 to just $5.60 as we write.

Another one that we've kept an eye on here at Penny Sleuth for quite awhile is Insteel Industries (NASDAQ: IIIN). Insteel makes reinforcement for roads, bridges and water/wastewater systems. Its products represent the new way of building the world's infrastructure.

As opposed to rebar, Insteel's engineered structural mesh, or ESM, holds up longer and is just as inexpensive ― if not cheaper. The best part about Insteel is its customer base. Around 90% of the company's business comes from nonresidential projects, which could be very important if the housing market takes longer to recover than the rest of the economy.

This fact alone hasn't done much to protect Insteel, however. Shares are down almost 50% over the past year.

While companies like these continue to take a bath in the market, smart investors should pay attention. Now is certainly not the time to buy. Remember, CAT is the indicator. Once that company tips its hand, and let's us know when a recovery is truly starting, companies like Manitowoc and Insteel could be the backdoor play for us small cap investors to make big money.

Infrastructure is possibly the most important theme we'll see in the recovery. The world's roads and bridges are collapsing beneath us. Water and wastewater systems are beginning to hurt as many people as they help with all the corrosion and impurities they are creating while they crumble. Even the energy sector ― with its trillions of dollars of backing ― is comprised, in many cases, of decades old turbine technology. Many power plants around the world date back as far as the Second World War. That doesn't even count the failing power grids that are overwhelmed by the massive and still-growing world population. And as more countries enter the rank of "developed," these problems will only get worse.

These are problems that cannot go unsolved…and companies like Manitowoc and Insteel hold the key to profits. Once CAT starts to make its recovery, these smaller two could make a few smart investors extraordinarily rich. The only thing we need to do is wait for CAT's signal.