More of the Same in 2015?

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As we move into the New Year, initial expectations are for a broad continuation of the trends seen in 2014. As published in our monthly Industrials & Materials review, Transport and Packaging stocks were the big winners at the sector level in the past year while Capital Goods, Electrical Equipment and industrial Conglomerates were weak, reflecting relative strength in the US economy and relative weakness abroad.

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2015 estimates are currently suggesting similar dynamics will play out over the year – domestically tied Transports and Packaging stocks are showing considerably more optimism than the globally levered machinery stocks.

A recent revision to our Transports index (to include a more representative history) shows the group to be the most expensive in our coverage, but there are instances where it looks like valuation still has room to catch up to above average returns (UNP, CSX). We will look to explore the Transports in greater detail in 2015.

Our stock preferences heading into 2015 include a familiar group of names:

  • AA – The best performer in Industrials & Materials in 2014 (+48%) has long been one of our favorites. No longer cheap on our model, we see solid demand growth and an improved portfolio mix continuing to support AA in 2015.

2014 researchAluminum: Perhaps Too Cautious Too Soon!; Alcoa: Self Help Can Take You Only So Far, Now We Need Pricing

  • CAT – Highly levered to global growth, but valuation/dividend support intact; operating leverage is high, so even a small swing in demand could be material.

2014 researchCAT: Now Mining Matters and Trends are Better

  • DD – Fairly valued on its own fundamentals, upside will come from activist led changes.

2014 research – DuPont Can Be A Bad Stock, If Trian is Right but Gives Up; DuPont: Ag-rivating, But Unlikely to Change Without Action; DuPont: A Cost Initiative Could Be Substantial; DuPont: The Case for $85, But Why We May Need to Be Patient

  • DE – Stock has slightly underperformed since we first wrote on it in August, but appeared to find its floor around $80 as we suggested.

2014 research – Deere: Earnings Risk Still Significant, But Likely Priced In

  • EMN – Valuation compelling, less vulnerable to possible disappointments in ethylene than others.

2014 research – Eastman Chemical: A Good Story, But At Risk of a Complexity “Own Goal”

  • PKG – A 12% relative outperformer since we first published, we think there is still upside in the name based on valuation and the tailwinds of lower crude and an accelerating US economy.

2014 research – Paper & Packaging: PKG and the Containerboard Market; Containerboard Capacity Additions Unlikely to Affect Operating Rates, PKG Well Insulated; The China OCC Question  

  • PX – An unusual opportunity to buy a very high quality company at a substantial discount.

2014 research – Praxair: An Unusual GARPY Opportunity; Industrial Gases: APD Must Focus on Costs, But PX the Better Investment; Air Products and Praxair: A Tale of Two Strategies

  • SWK – Still a cheap stock with strong operating leverage and business momentum; Security margins improving and tactical divestment of underperforming European geographies could change sentiment and shift attention to the company’s strengths.

2014 research – SWK: Business Momentum to Continue; SWK: Upside to Earnings and to Sentiment

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