NEW YORK (CNNMoney.com) -- When you think of hot momentum stocks, a company that makes tractors, hydraulic excavators and other construction equipment probably isn't the first thing that comes to mind. Maybe it should be.
Caterpillar (CAT, Fortune 500) is the top performing stock in the Dow this year, surging more than 56%. The company has been on a tear despite sluggish economic growth in the United States thanks to its increased presence in emerging economies like China and exposure to the booming commodities market.
Can Caterpillar continue to capitalize on these trends? Several backers of the stock believe so.
Caterpillar clearly is making a big bet that commodity prices, particularly for metals, will continue to surge. The company announced last month that it was buying mining equipment manufacturer Bucyrus (BUCY) for $7.6 billion.
The move raised some eyebrows because of the price -- Caterpillar was paying a 32% premium -- but several fund managers that own Caterpillar said they love the deal.
Steve Neimeth, manager of the SunAmerica Value Fund (SSVAX) in Jersey City, N.J., said that the Bucyrus deal will give Caterpillar an even bigger presence in China, where manufacturing is growing at an almost fever pitch.
Neimeth also said that as long as the U.S. economy remains relatively weak, the Federal Reserve is likely to continue doing what it can to bolster the economy through more long-term bond purchases. That could put pressure on the dollar and boost commodity prices even higher.
Translation: More demand to mine metals and other basic materials.
"Commodity inflation definitely benefits Caterpillar," Neimeth said. "Companies around the world are going to be investing further in mining equipment."
For that reason, Neimeth said he thinks some analysts are underestimating how much Caterpillar will be able to earn in the next few years. He thinks the Bucyrus deal could add as much as 10% to Caterpillar's profits.
That's even more impressive when you consider analysts already are forecasting nearly 20% revenue growth for Caterpillar in 2011 and an earnings per share increase of 46%.
Tom McIntyre, president or Orleans, Mass.-based money management firm McIntyre, Freedman & Flynn Investment Advisers, said the company is in an enviable position. Caterpillar is one of his firm's largest holdings.
McIntyre said that while many companies are still struggling to adapt to the post-Great Recession world, an environment where businesses and consumers in the U.S. seem reluctant to spend, Caterpillar has emerged from the downturn with a stronger balance sheet that can allow it to easily grow.
Of course, the fact that Caterpillar sold $733.3 million in commercial paper to the Federal Reserve during the height of the crisis, as was disclosed by the Fed earlier this week, probably helped the company's finances remain stable.
But Caterpillar is taking other steps to raise capital to finance expansion. Last month, the company sold $150 million's worth of yuan bonds in Hong Kong. Caterpillar is only the second U.S. multinational to make such a move, joining McDonald's (MCD, Fortune 500).
McIntyre said that Caterpillar is wise to keep exploring more ways to grow overseas. He pointed to Friday's disappointing November jobs report as another somewhat paradoxical reason why Caterpillar is likely to continue doing well. He said it justifies the rationale to keep looking abroad for growth.
"Caterpillar is a leader in an industry that is flourishing despite high unemployment in the United States because you have low interest rates and emerging markets growth," he said. "Even though the jobs news in us is terrible, the outlook for caterpillar remains good."
Still, there are clear risks to the Caterpillar growth story. John Snyder, manager of the John Hancock Sovereign Investors Fund in Berwyn. Pa., said that Caterpillar now finds itself as a company that has to live up to lofty expectations.
Snyder owns the stock in his fund but he said he's not looking to add more right now given how much it has already run up in 2010.
"If Caterpillar keeps meeting its estimates, the stock could still outperform. So far they have not disappointed," he said. "But there is a risk that Caterpillar could go down more than other industrial stocks because of profit taking. It's not exactly an undiscovered stock."
Caterpillar trades at about 15.5 times 2011 earnings estimates. That's not absurdly expensive for a growth stock. But Snyder said he's a little worried that investors may be forgetting that Caterpillar is still, at heart, a cyclical company.
That brings us to China. There are concerns that China's economy may be overheating and that central bankers there will be too late to react to rising inflation.
George Magnus, senior economic advisor with UBS in London and author of the new book "Uprising: Will Emerging Markets Shape or Shake the World Economy?", said that companies like Caterpillar run the risk of overexpanding in China. (For more of Magnus' views on China, check out my Fortune colleague Colin Barr's interview with him.)
Magnus said that any company looking to expand in China (and any investor looking to buy stocks of companies increasing their presence there) have to realize that it is not easy to do business in China.
He pointed to the censorship spat between China and search giant Google (GOOG, Fortune 500) earlier this year as a perfect example of the risks of putting too much emphasis on a market that's still not completely open.
"One of the things that frightens non-professional investors about China, is that it's an opaque place. Nobody understands the governance issues," he said. "The Google episode is an interesting case where it's clear that there could be problems with becoming overcommitted in China."
But Magnus said those risks probably won't deter Caterpillar or other companies from stepping up investments there.
"It's hard to turn your back on a market with 1.3 billion people where per capita income is probably going to increase by three- to four-fold over the next few years," he quipped.
Reader comment of the week. The debate over whether the future of BlackBerry maker Research in Motion is sweet or sour will continue for a while. One reader points out though why RIM may have some breathing room.
"I'm a creature of habit and love my BB," writes Lori Rosen. That may sound trite but it can't be underestimated. Many big businesses are also slow to change habits and as long as that's the case, RIM should be able to avoid obsolescence, despite challenges from Apple and others.
- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney.com, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
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