By Barbara Eisner Bayer (TMF Venus)
June 13, 2000

The Foolish Four technique is similar to going to the dentist. Both are basically once-a-year events. An annual checkup will most likely do the trick to keep your portfolio in order and your teeth on a healthy track (and hopefully in your mouth). The dentist will examine your molars, "rebalance" your hygienic habits, and probably ramble on about his vacation while you sit there with your jaw aching.

A good investor may want to spend a little more time tending to his companies in between the yearly rebalancing. For dental hygiene, it's necessary; but for Foolish Four investing, it's more of a pleasant diversion and a way of making certain the companies aren't headed for a root canal.

Today it's time for Caterpillar's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CAT)") else Response.Write("(NYSE: CAT)") end if %> checkup. This gives us a chance to ask the designer, manufacturer, and marketer of earth-moving, construction, and materials-handling machinery and heavy-duty engines, "How ya doing?"

I last wrote optimistically about Caterpillar back in April, when its reported earnings smashed through estimates. Although I was hopeful that this wonderful earnings report would result in some upward momentum, the stock price has languished like a humidity-encrusted tennis ball on the slow red clay tennis courts of the recent French Open.

Companies, however, pay only modest attention to short-term price action; investors who focus on little else will get nothing but grief. What should matter to investors (who are owners, remember?) is whether the company is on target to meet its growth and revenue expectations. If it's leading the way in that department, the stock price will ultimately follow.

So how's Caterpillar doing on the business end?

Its highest-margin product -- big-ticket diesel and turbine engines that are used in the oil and gas market (say THAT three times quickly) -- is experiencing continued demand. Higher demand equals higher sales, and could definitely benefit earnings in the near future.

While Caterpillar's North American machinery business has been under pressure -- especially with the rise in interest rates -- global sales in Europe, Africa, and the Middle East have been fairly strong and well ahead of expectations. In Asia, sales have been on the rise for nine consecutive months. In Europe, sales have been up for five straight months. If this is a trend, we're happy to be owners of this company.

If you travel throughout the United States during the warm weather months, you can't help but notice the massive amounts of highway construction underway. If you actually pay attention to the speed reductions mandated throughout these construction zones, you will notice that the Caterpillar name appears on many of the vehicles used. (If you don't, chances are good you'll notice the flashing lights that appear on many of the police cars that patrol them.) Caterpillar's participation in all phases of highway construction, repairing, and upgrading has only wonderful implications for the bottom line.

Another incentive that could reflect positively going forward is the company's stock repurchase program. As the stock price remains low, management has the incentive to aggressively pursue its commitment to reduce the share count to 320 million within one to three years. More than 5 million shares were bought back in the first quarter. At this price, can more buying be far behind?

Caterpillar continues to pursue new markets. Last week, it was among the U.S. delegates who journeyed to Cuba to show support for easing the embargo against our communist neighbor, hopefully allowing expansion into that untapped market. A bill to ease sanctions is currently pending in the House of Representatives, but faces stiff opposition.

And finally, Caterpillar has teamed up with Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> to create an attraction where future Foolish Four investors can have fun learning about agriculture. The "Bountiful Valley Farm," which will be located next to Disneyland in Anaheim, will enable folks to "climb aboard a Caterpillar Challenger tractor, join an interactive Farmers Expo and stroll amidst plots of crops." How many city slickers will be transformed into Farmer Johns? How many Caterpillars will be sporting mouse ears?

While the stock price is languishing, Caterpillar management continues to move forward by focusing on growth and maintaining its business. That's all that investors can hope for. Ultimately, the stock price will reflect the strength of the business. By earning a berth in the Dow 30, Caterpillar has already established itself as a leader in American industry. However long it takes for the company's price to recover and reach all-time highs, Foolish Four investors will be there to reap the benefits. That's the beauty of the technique.

Sometimes, however, the math used in the technique is subject to human error. This happened yesterday, when Alcoa split. We didn't get the dividend manually updated before the Top Ten Dow Stocks list (over there on the right) was automatically run. Therefore, Alcoa was erroneously listed as Number 2 on the Foolish Four list, when it should have appeared as Number 8. This has now been corrected. If you bought Alcoa today, don't worry -- simply treat it as you would any other Foolish Four stock. All of the Top Ten Dow stocks are potentially good investments. The 2-5 stocks usually do a bit better than 6-10, but not always.

Visiting your dentist and investing in the Foolish Four when it's struggling to beat the market are not fun. But persevere, both through down markets and high-cavity visits, and the Tooth Fairy will add a bounty of riches under your portfolio pillow.

P.S. Be sure to play The Motley Fool's Stock Madness contest. You could win a $1,000 BUYandHold.com account, a Dell computer, or other prizes. You must enter your stock picks by Wednesday night, so don't delay!