Cyclical companies that are too attached to the business cycle tend to be doomed when the broader economy slows.
That explains why Caterpillar came up short in its second-quarter report Wednesday, CNBC's Jim Cramer said, and why the stock dropped 4% during the session. The heavy machinery manufacturer took a hit from higher raw costs and supply.
"At the end of the day, Caterpillar turned out to be too beholden to the oil and gas cycle. Now, we know from Halliburton, which is cutting back its workforce in the Permian Basin, that drilling is deeply cyclical," the "Mad Money" host said.
"Still, I think it's a buy if it pulls back below $130 ... because I believe [CEO Jim Umpleby] can turn things around and make it so it's more of a secular grower, but now I only feel comfortable saying that because it looks like the Fed's going to cut interest rates."
It takes time, but other cyclical stocks like United Parcel Service, Union Pacific and Honeywell have been able to develop secular plays, Cramer noted. Secular businesses are not impacted by short-term economic trends.
The transports company, in particular, tapped into the secular e-commerce business, he said. UPS beat earnings and revenue estimates in its second quarter, and shares surged more than 8% in the session to close north of $114 a share.
"Wall Street always pays more for a secular grower than a cyclical one," Cramer said.
"Watch this process. When the cyclicals can pull it off, it's like the transformation from an ugly caterpillar into a beautiful butterfly," the host said. "And if they fail? Well, that's just plain old Caterpillar."
Disclosure: Cramer's charitable trust owns shares of Caterpillar and Honeywell.