Why beaten-down Dow stock Caterpillar is still a buy

Caterpillar shares have taken it on the chin in recent months amid international trade tensions, and its quarterly earnings report scheduled for Monday morning will shed light on how the industrial name is faring.

Some say the stock is a smart bet ahead of earnings even as Caterpillar's performance – down 18 percent from its recent high hit in January – makes it the third worst-performing Dow stock in the last six months.

Mark Tepper, president and CEO of Strategic Wealth Partners, explained his bull case Thursday on CNBC's "Trading Nation." Here's what he said.

In its first-quarter earnings report Caterpillar beat Wall Street analysts' estimates on both the top and bottom lines. That kind of growth in both revenue and earnings should continue into the second quarter. Its prior earnings report showed, too, a growth in its backlog, indicating strong demand.

• Infrastructure development in China will likely continue as a tail wind for the stock, and continued improvement in residential and nonresidential construction, as well as a proposed infrastructure revival in the U.S., will likely drive revenue higher.

• The company's cost-cutting plan, rolled out several years ago, is expected to lower annual operating expenses by $1.5 billion; that's $1.5 billion every year. This, combined with a forecast increase in revenue, should be bullish for the name.

• The key metrics to watch are Caterpillar's backlog and inflation in its material costs. Its backlog will likely continue rising as a result of strong demand, and shareholders will look to see that material cost inflation due to steel tariffs isn't side tracking earnings growth. Analysts are expecting Caterpillar to report earnings of $2.73 per share, according to FactSet data.

Bottom line: Though Caterpillar has fallen in recent months as it's mired in trade tensions, it's a buy ahead of earnings due in part to strong demand, according to Tepper.

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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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