After The Storm Clouds Clear – What to Buy On A Dip

gcopley
  • We expect many of the companies in our coverage universe to miss first quarter estimates – either choosing to guide down proactively over the next few weeks or simply coming up short when they announce.  This will provide some incremental buying opportunities for some companies and may undermine (over)confidence at others.
  • The misses will mostly be US weather related, reflecting either weaker demand or the cost pressure caused by higher energy prices.  While this should be largely expected, the market has for the most part ignored the risk and estimates really have not fallen that far.
  • Those that have offered guidance have taken a valuation hit, and where these are reasonably priced companies levered to the broader recovery in US manufacturing and general economic growth we see a buying opportunity.   We would focus on HUN, OLN, OI, BLL, SWK, DE and AGCO, but include a longer list of interesting names in the report, including several in the transport space.
  • Equally, companies that are discounting very lofty earnings expectations may have the marginal confidence knocked out of them if they miss Q1 materially, regardless of the excuse.  Here we would be most concerned about SHW, CYT, SEE, GNRC, HON, RPM and GWR.  These names are more likely to see a more permanent exit from non-traditional holders, and further downside.
  • The other downside risk sits at the commodity chemical group, where the higher costs in Q1 have been dismissed as a short term distraction.  If natural gas prices stay high – $4.50-5.00 (perhaps because of an expected hot summer and low inventories), this group has the most significant downside in our view; LYB, WLK and DOW.
  • For the medium term, we continue to see the Capital Goods space as the most attractive from a weighting perspective and would add ETN and CMI to CAT and SWK in the table below.  Outside Capital goods we are much more selective.

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