Returns Overview
Cummins Inc. (CMI) has exhibited a robust long-term return profile, consistently generating substantial alpha against both the broader market and its Industrials sector benchmark over multi-year horizons. The company's returns ranged from a 1-month decline of -6.95% to an impressive 5-year gain of 134.42%. CMI delivered particularly strong performance over the 6-month to 3-year periods, with absolute returns of 28.63%, 75.2%, 90.43%, and 141.68% respectively, alongside significant absolute alpha contributions of 29.58%, 57.16%, 64.35%, and 80.46% over these same intervals. While the most recent 1-month period saw a negative return and negative absolute alpha of -3.26%, this short-term underperformance represents a divergence from a prolonged trend of considerable outperformance.
Period Returns vs S&P 500 & XLI (Industrials)
| Company | 1M | 3M | 6M | 1Y | 2Y | 3Y | 5Y |
|---|---|---|---|---|---|---|---|
| CMI |
-7.0%
α -3.3% s.α -0.2% |
6.4%
α 9.7% s.α -0.1% |
28.6%
α 29.6% s.α 21.2% |
75.2%
α 57.2% s.α 47.8% |
90.4%
α 64.3% s.α 55.9% |
141.7%
α 80.5% s.α 71.4% |
134.4%
α 67.7% s.α 53.8% |
| S&P 500 | -3.7% | -3.2% | -0.9% | 18.1% | 26.1% | 61.2% | 66.8% |
| XLI | -6.8% | 6.5% | 7.5% | 27.4% | 34.5% | 70.2% | 80.6% |
Company Assessments
Cummins Inc. has demonstrated exceptional long-term return generation, delivering significant absolute alpha of 53.84% against its sector over five years and 71.44% over three years. Despite a recent 1-month pullback of -6.95% and minor sector underperformance over three months (-0.05% sector alpha), the company consistently outperformed across all other measured periods from six months to five years, with its 3-year absolute return of 141.68% being particularly noteworthy. This indicates CMI has been a standout performer, albeit with a recent short-term moderation following substantial gains.
Volatility Analysis
An examination of Cummins Inc.'s volatility profile reveals a significantly higher risk characteristic compared to the broader market benchmark, the S&P 500. The company's annualized volatility substantially exceeds that of the index, indicating a greater degree of price fluctuation. Furthermore, recent trailing volatility metrics suggest an acceleration in price dispersion, with both 60-day and 252-day annualized volatilities surpassing the long-term average. This elevated volatility is coupled with a notable downside deviation and a substantial maximum drawdown, underscoring the potential for significant capital impairment during adverse market conditions. While the speed of recovery from its deepest drawdown demonstrates a degree of resilience, the overall profile points to a higher-beta equity with pronounced cyclical sensitivity.
Volatility Metrics
| Company | Ann. Vol | S&P 500 Vol | Downside Dev | Max Drawdown | 60d Vol | 252d Vol |
|---|---|---|---|---|---|---|
| CMI | 27.6% | 17.82% | 19.61% |
-44.05%
2019-11-11 → 2020-03-23 |
37.54% | 33.54% |
Company Assessments
Cummins Inc. (CMI) demonstrates an equity volatility profile that is considerably more pronounced than the S&P 500. The company's annualized volatility stands at 27.6%, which is 54.8% higher than the S&P 500's 17.82%, indicating a significantly greater magnitude of daily price movements. This elevated volatility is further evidenced by a downside deviation of 19.61%, suggesting substantial risk of negative returns. The maximum drawdown recorded for CMI was -44.05%, occurring between November 11, 2019, and March 23, 2020, coincident with the initial phase of the COVID-19 pandemic. While the depth of this drawdown is significant, the recovery period was relatively swift, concluding by June 08, 2020, demonstrating the business's capacity for rebound in a recovery environment. Analyzing recent volatility trends, CMI's 252-day (trailing one-year) volatility is 33.54%, which is above its overall annualized volatility of 27.6%. More acutely, the 60-day (trailing three-month) volatility is 37.54%, indicating a recent acceleration in price dispersion and a current trading environment characterized by heightened short-term fluctuations. This suggests that the company is presently experiencing a period of increased price instability relative to its historical average, signaling a higher immediate risk premium for investors.
Beta & Correlation
Beta and correlation analysis provides critical insights into a company's market sensitivity and the composition of its total risk. Trailing beta measures the historical volatility of a stock relative to the overall market, or a specific benchmark, with values below 0.8 typically indicating a defensive posture, between 0.8 and 1.2 suggesting market-like behavior, and above 1.2 signifying an aggressive profile. Asymmetric beta, differentiating between upside and downside market movements, is particularly important for active managers seeking to manage portfolio convexity; a stock with a lower downside beta captures less of market declines, while a higher upside beta captures more of market advances. R-squared quantifies the proportion of a stock's variance explained by the market, directly indicating the split between systematic (market-driven) and idiosyncratic (company-specific) risk. A higher R-squared implies less diversification benefit from holding the stock in a market-tracking portfolio, as its movements are largely explained by the market. Furthermore, decomposing risk sources by comparing market beta against sector beta allows for a granular understanding of whether a company's systematic risk predominantly stems from broad market movements or from specific industry dynamics. A company with a market beta significantly different from its sector beta indicates that its risk profile is influenced by factors beyond its immediate industry trends. This distinction is crucial for portfolio construction, enabling investors to isolate and manage exposures to general market risk versus sector-specific risk, thereby enhancing the precision of risk budgeting and alpha generation strategies.
Beta & Correlation Metrics
| Company | Trailing Beta | Upside Beta | Downside Beta | R² | Correlation | Systematic | Idiosyncratic | XLI Beta | Sector Corr | Sector R² |
|---|---|---|---|---|---|---|---|---|---|---|
| CMI | 0.976 | 1.012 | 0.878 | 0.397 | 0.63 | 39.7% | 60.3% | 1.051 | 0.744 | 0.553 |
Company Assessments
Cummins Inc. (CMI) exhibits a trailing beta of 0.976 against the S&P 500, positioning it as a market-like asset. This indicates that the company's equity historically moves largely in line with the broader market, neither significantly amplifying nor dampening market-wide fluctuations. A notable asymmetry in its beta profile is observed: an upside beta of 1.012 suggests that CMI captures approximately 101.2% of market advances, while a downside beta of 0.878 indicates it participates in only 87.8% of market declines. This characteristic implies a favorable risk-return profile during market downturns, as it offers a degree of protection relative to its market-like overall beta. The R-squared of 0.397 signifies that 39.7% of CMI's price variance is attributable to movements in the S&P 500, implying that 60.3% of its risk is idiosyncratic. This substantial idiosyncratic component suggests that company-specific factors, such as operational performance, competitive dynamics, and strategic initiatives, are primary drivers of its stock performance, offering diversification benefits within a broader market portfolio. When assessed against its sector, Industrials (XLI), CMI demonstrates a sector beta of 1.051 and a sector R-squared of 0.553. This indicates that CMI is moderately more sensitive to Industrials sector movements than to the broader market, and a larger portion (55.3%) of its variance is explained by sector dynamics compared to market dynamics. The higher sector R-squared and correlation (0.744 vs. 0.63 for the market) suggest that while CMI is influenced by general market trends, its performance is even more closely tied to the specific cyclicality and fundamental drivers of the Industrials sector.
Risk-Adjusted Returns
An assessment of Cummins Inc.'s risk-adjusted performance reveals a nuanced profile, indicating moderate efficiency in generating excess returns relative to the risk assumed. The company's Sharpe Ratio of 0.526 suggests that, over the measurement period, it has delivered positive excess returns above the 3.64% risk-free rate, but this return-to-risk efficiency is below what is typically considered a 'good' threshold of 1.0. This implies that while the company has compensated investors for the total risk taken, the magnitude of compensation has been modest relative to the volatility experienced. Further analysis through the Sortino Ratio provides a more favorable perspective on the company's downside risk management. A higher Sortino Ratio compared to the Sharpe Ratio indicates that the company's performance is less susceptible to negative volatility, a critical consideration for investors focused on preserving capital during market downturns. However, the Calmar Ratio, which assesses return relative to maximum drawdown, suggests that the company has experienced significant periods of capital impairment that have been substantial relative to its annualized returns. The Information Ratio, at 0.285, points to a modest ability to generate alpha against an implicit benchmark, falling short of the threshold typically associated with consistent active management skill. Overall, the risk-adjusted metrics paint a picture of a business that, while delivering positive excess returns, exhibits areas for potential improvement in terms of overall risk efficiency and drawdown management. The strong performance on the Sortino Ratio is a notable positive, indicating a degree of resilience against adverse market movements, which can be a valuable characteristic for long-term portfolio construction.
Risk-Adjusted Metrics
Risk-free rate: 3.64% (Fed Funds Rate)
| Company | Sharpe | Sortino | Calmar | Info Ratio | Treynor |
|---|---|---|---|---|---|
| CMI | 0.526 | 0.741 | 0.412 | 0.285 | 14.885 |
Company Assessments
Cummins Inc. (CMI) demonstrates a mixed but generally positive risk-adjusted return profile. The Sharpe Ratio of 0.526 indicates that the company has generated 0.526 units of excess return for each unit of total risk taken above the 3.64% risk-free rate. While this signifies positive risk-adjusted performance, it is below the 1.0 threshold generally considered to be 'good,' suggesting that the total risk assumed has been relatively high compared to the excess returns achieved. A key strength for CMI is observed in its Sortino Ratio of 0.741, which significantly surpasses its Sharpe Ratio. This disparity suggests a more favorable downside risk profile, meaning the company's returns are less volatile on the downside than its overall volatility. This characteristic is particularly attractive for risk-averse investors, as it implies a better ability to mitigate losses during periods of negative market movements. The Calmar Ratio of 0.412, however, indicates that the company's maximum drawdown has been substantial relative to its annualized returns, suggesting that while returns are generated, periods of significant capital impairment have occurred. The Treynor Ratio of 14.885 implies strong compensation for systematic risk, while the Information Ratio of 0.285 suggests a modest, but not consistently strong, ability to generate alpha relative to an implicit benchmark.
Market Regime Analysis
Cummins Inc. (CMI) exhibits a distinct cyclical sensitivity, demonstrating robust performance during bull market phases, particularly when volatility is elevated. The company's average monthly returns are positive across both Bull-LowVol (1.98%) and Bull-HighVol (3.76%) regimes, with a notable acceleration in volatile uptrends. Conversely, CMI experiences negative average monthly returns in bear market conditions, registering -4.12% in Bear-LowVol and -1.09% in Bear-HighVol. This pattern suggests that while the company benefits significantly from market exuberance, it is not immune to downturns. However, its performance in Bear-HighVol regimes, characterized by market stress, is notably less severe than in Bear-LowVol, hinting at some potential idiosyncratic resilience or sector dynamics during crisis-like environments. The overall capture ratios indicate a favorable asymmetry, where the company tends to capture more of the market's upside than its downside.
Current Market Regime: Bear-HighVol
Regime Returns & Capture Ratios
| Company | Bull-LowVol | Bull-HighVol | Bear-LowVol | Bear-HighVol | Up Capture | Down Capture | Ratio |
|---|---|---|---|---|---|---|---|
| CMI |
1.98%
60m |
3.76%
36m |
-4.12%
5m |
-1.09%
32m |
127.9% | 108.9% | 1.17 |
Company Assessments
Cummins Inc. (CMI) has historically demonstrated strong participation in market uptrends, with average monthly returns of 1.98% during Bull-LowVol regimes (spanning 60 months) and an even more pronounced 3.76% during Bull-HighVol regimes (36 months). This suggests that the company's business model, heavily tied to industrial cycles and capital expenditure, benefits significantly from periods of market optimism, with an amplified positive response when market volatility is concurrently high. Conversely, CMI experiences negative average monthly returns during market downturns. In Bear-LowVol regimes (5 months), the company recorded an average monthly decline of -4.12%, indicating susceptibility to orderly market pullbacks. However, in Bear-HighVol regimes (32 months), CMI's average monthly decline was a comparatively milder -1.09%. This performance in high-volatility bear markets, which often reflect crisis conditions, is less detrimental than in orderly declines, suggesting a potential flight to quality within the industrial sector or a robust underlying demand for essential equipment and services that provides a partial cushion during extreme market stress. The company's capture ratios further illuminate its performance asymmetry. CMI exhibits an Upside Capture of 127.9%, meaning it historically captures 127.9% of the market's positive movements. Its Downside Capture stands at 108.9%, indicating it captures 108.9% of the market's negative movements. The resulting Capture Ratio (Up/Down) of 1.17 is favorable, as it is greater than 1.0, signifying that CMI participates more robustly in market rallies than in market declines. This characteristic positions CMI as a growth-oriented cyclical play with a beneficial asymmetry. Given the current Bear-HighVol market regime, CMI's historical performance suggests it will likely experience negative returns, though potentially less severe than in orderly bear markets, as its average monthly decline in this regime has been -1.09%. Investors should anticipate continued pressure on the stock, albeit with a historical tendency for relative resilience within this specific downturn environment.
Investment Highlights & Risk Summary
For institutional investors, CMI presents a compelling case for growth-oriented portfolios seeking high absolute and relative returns within the industrials sector. The challenge lies in managing the inherent volatility and the demonstrated susceptibility to deep drawdowns, which necessitates a robust risk management framework, potentially through position sizing or hedging strategies, to mitigate significant capital loss risk and align with overall portfolio objectives for capital preservation.
Investment Highlights
- **Exceptional Absolute and Relative Returns**: CMI delivered a 1-year return of 75.2%, generating a substantial alpha of 57.16% against the S&P 500 and 47.84% against its sector ETF (XLI).
- **Strong Upside Participation**: The company demonstrates a robust upside capture ratio of 127.9%, indicating a significant ability to capitalize on market uptrends.
- **Favorable Risk-Adjusted Returns (Sortino)**: A Sortino ratio of 0.741, which is higher than its Sharpe ratio of 0.526, suggests a more efficient return generation when accounting specifically for downside volatility.
- **Sector Outperformance**: CMI significantly outperformed its industrial sector peers, delivering a 47.84% alpha against the XLI ETF.
- **Market-Proximate Systematic Risk**: With a beta of 0.976, CMI exhibits systematic risk exposure closely aligned with the broader market, making it a suitable core holding in certain market conditions.
Summary Dashboard
| Company | 1Y Return | 1Y Alpha | XLI Alpha | Sector Beta | Vol | Max DD | Beta | Sharpe | Sortino | Flags |
|---|---|---|---|---|---|---|---|---|---|---|
| CMI | 75.2% | 57.2% | 47.8% | 1.051 | 27.6% | -44.0% | 0.976 | 0.526 | 0.741 | 1 |
Risk-Return Rankings
Cummins Inc. offers robust absolute and relative returns driven by strong upside capture, but carries elevated risk due to high volatility and a history of deep drawdowns.
Strength: Exceptional 1-year absolute return of 75.2% and significant alpha generation against both the S&P 500 and its sector.
Concern: A historical maximum drawdown of -44.05% signals substantial capital loss risk.
Key Takeaways
- CMI has delivered outstanding absolute and relative returns over the past year, significantly outperforming both the broad market and its sector.
- The company exhibits strong upside participation, capturing nearly 128% of market gains, which is a key driver of its alpha.
- Investors must be cognizant of CMI's elevated annualized volatility of 27.6% and its demonstrated susceptibility to severe drawdowns, evidenced by a -44.05% maximum drawdown.
- Despite a moderate overall beta of 0.976, the downside capture of 108.9% suggests CMI does not offer significant downside protection relative to the market.
- The positive Sortino ratio of 0.741 indicates that, when considering only downside volatility, the risk-adjusted returns are more favorable than implied by the Sharpe ratio alone.
Portfolio Implications
For institutional investors, CMI represents a high-conviction growth opportunity within the Industrials sector, suitable for portfolios with a higher risk tolerance or those seeking to capitalize on strong cyclical momentum. Its significant alpha generation and strong upside capture make it an attractive component for enhancing portfolio returns. However, its elevated volatility and the substantial historical maximum drawdown necessitate careful position sizing and potentially dynamic risk management strategies. Given its beta close to 1.0, CMI does not inherently offer significant diversification benefits in terms of systematic risk, but its strong idiosyncratic performance could be a valuable addition. Investors should consider its potential for capital impairment during market contractions and may wish to complement CMI with lower-volatility assets or tactical hedges to manage overall portfolio risk.