By Jeff Reeves, MarketWatch
Trade-war talk has dominated headlines as the U.S. and China engage in a tit-for-tat on tariffs. The result has been a volatile year for top industrial firms that do business in Asia.
Perhaps nothing illustrates this give-and-take better than the iShares U.S. Industrials ETF (IYJ), which has boomeranged from about $160 in September 2018 to a low of under $120 in early 2019 and then back to crest the $160 mark once more and set a new all-time high.
That dramatic bounce shows that timing is everything. If you've been holding the iShares U.S. Industrials ETF(IYJ) for the past 12 month, then you may have very little to show for it. Then again, a bargain purchase during one of the low periods could have handed you gains of more than 30% in short order. In the past three months, the industrial sector has been the No. 3 performer among 11 tracked by S&P. Over 12 months, industrials rank No. 8, showing recent strong performance.
It's anybody's guess what the latest Trump tweet will do to companies that rely on Chinese trade, so short-term volatility is surely to be expected for some time. However, investors have proven that they will keep coming back to select stocks after valuations drop to bargain levels they simply can't pass up. And, now, the industrial sector seems to have the wind at its back.
So which stocks are attractive? Here are five:
We'll start with Corning (GLW) because it has been in the news after a 6% decline on Tuesday owing to trouble at its display and fiber-optic arms ( ). That's disappointing, particularly because the two divisions contribute about half of the company's revenue. But the glass-half-full argument for this specialty glassmaker is that the rest of its revenue comes from other units that hold promise -- including specialty materials for filter materials, smartphone screens and life-science applications.
Furthermore, it's important to keep the magnitude of the forecast shift in mind. The company said it would swing from a previously projected low single-digit increase to a low single-digit decline. Any decline is bad news, of course, but it seems quite an extreme reaction for a swing that may simply turn out to be from an expected 2% up to 2% down. Plenty of firms on Wall Street post those kinds of numbers with zero warning!
And by the way, while investors this week are caught up in the recent leg down, it's worth noting the price history of Corning stock: It fell below $29 in December and again in May before its recent trouble in August, and each time quickly snapped back to $33 or higher. That's a hint that investors have faith in a floor for Corning's stock. With the shares comfortably above their 52-week low of $26.8 even after recent volatility, there's a good chance Corning will find a floor here.
Another troubled industrial player that many investors may not trust is General Electric (GE). However, despite massive challenges over the past decade or so, some investors seem to think that the worst is over for GE as it right-sizes itself and gets focused on a turnaround.
The most obvious proof of that turnaround: GE's stock bottomed at around $6.50 in December and then rallied more than 70% to crest $11 a share this year. Shares have consolidated lately, but remain comfortably above support levels of around $9. And now that the industrial icon has closed its sale () of Baker Hughes (BHGE), there are hints that the plan to reduce debt and focus on core businesses is finally coming together.
In fact, a William Blair analyst said in a note earlier this year that its "resurrection ()" could accelerate from here, including an IPO of GE's health-care unit that would certainly pique Wall Street's interest. And with a persistently low interest rate environment, GE can expect easy access to capital to facilitate its turnaround and recovery.
Caterpillar (CAT) fell more than 35% from its 2018 peak to recent lows in early 2019, in large part because of weakness in its construction and upstream oil and gas arms. However, those who are optimistic about industrials can find a lot to like about Caterpillar.
Count among those bulls a Bank of America analyst who plotted a price target of $160 (Caterpillar several months ago, thanks in large part to a favorable valuation versus peers and the prospects of lower interest rates. That valuation remains attractive at a forward P/E of less than 11, compared with about 18 for the broader Dow Jones Industrial Average , and the current environment of rock-bottom rates means Caterpillar can borrow incredibly cheaply right now.) for
Given recent uncertainty about global oil supplies, some analysts expect a nice tailwind (Caterpillar's related businesses in the second half of 2019. And that's on top of record second-quarter earnings ( ).) for
Sure, executives acknowledged tariffs could lead to an increase in costs. However, management is confident they can raise prices to offset the higher expenses and sustain profitability. Throw in a nice 3.1% dividend that is only about a third of earnings and ripe for future increases and it's easy to see the case for Caterpillar.
Boeing (BA) is another company that has been benefiting from the recent dust-up in the Middle East, in large part because of its defense business. And perhaps most importantly, the bids for Boeing's stock come at a crucial time when sentiment is starting to shift for this industrial giant.
Over the past year or so, headlines have been largely unfavorable for Boeing. From the grounding of the 737 Max ( ) to concerns over the Defense Department's refusal to take delivery ( ) of KC-46 tankers, investors have had plenty of red flags to make them head for the hills -- including news this summer that increased 737 costs will eat into future margins ( ).
Clearly, investors feel like they know everything they need to about the state of Boeing's recent production woes, as Boeing's stock has pushed to its highest level since April. Investors don't need a long memory to see why, either, as this defense giant rallied strongly across all of 2017 on the prospect of stronger defense spending under the Trump administration. Simply getting back to their recent highs of around $440 a share would deliver a nice 15% to 20% gain for investors who buy now.
You may not classify Accenture (ACN) as an industrial stock, but it is an important consultant to a host of industrial players, including automotive, freight, electrical-equipment and consumer-durable-goods companies. And the bottom line is that in an era of persistent profitability pressures for industrial firms, Accenture is a crucial partner for many industrial companies of all sizes. As a result, it's an important component in the aforementioned iShares U.S. Industrials ETF, making up more than 3% of the fund's holdings.
That doesn't mean Accenture doesn't have a tech angle. Its recent acquisition ( ) of an up-and-coming artificial intelligence and big data firm in Spain proves that. But Accenture is all about using technology and data to serve all sectors -- including key industrial players.
The fact that Accenture's approach has been connecting with clients has been evident all year, starting with a blowout report in March ( ) that shows 8% growth in North America and 9% in Europe and then a strong report in June that featured higher full-year guidance ( /).
There was a bit of uncertainty to start the year after Accenture's CEO stepped down for health reasons, but the appointment of insider Julie Sweet in July hinted that the company wouldn't miss a beat. A steady upward climb for shares this year backs that notion, with Accenture racking up nearly 40% gains since Jan. 1.
Jeff Reeves is a MarketWatch columnist.
-Jeff Reeves; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
September 18, 2019 16:25 ET (20:25 GMT)
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