Industrials

  • 08 Nov
    Why government gridlock could be a good thing for these 2 sectors

    Why government gridlock could be a good thing for these 2 sectors

    October was a rough month for the stock market, proven by the decline of the NASDAQ and Dow Jones Industrial Average into clear correction territory, while the S&P 500 halted its own slide just shy of that mark. It was enough to put a lot of investors and analysts on edge and start to wonder if the good times were finally coming to an end.

    What a difference a week makes! After closing out the worst October, and one-month period in a decade, the market has rebounded strongly over the last week. The Dow is up a little over 6.6%, the NASDAQ 8.3%, and the S&P 500 6.7% in that time. This week may have provided an unexpected catalyst for the market to push back and retest the all-time highs set in late September. Mid-term elections on Tuesday left Democrats in control of the House of Representatives, while Republicans kept their spot in the driver’s seat in the Senate.



    Depending on your political view, a divided government may not be a good thing; major reforms or initiatives from either side of aisle become more difficult without one party in control of both houses of government. It isn’t unreasonable to suggest that one of the reasons President Trump could afford to be as confrontational as he has, with a consistent, “my way or the highway” attitude about everything from tax reform, trade and most certainly his major staff advisors and political appointees is because Republicans controlled Congress and the Senate. That usually meant that even if a lot of Republicans and conservatives criticized his approach, the party at large generally fell into line behind him.

    As an investor, it’s not always easy to separate investing discipline and objectivity from political opinion and preference. That becomes harder when politics have a clear and direct impact on economic progress and market behavior. The Tax Reform Act at the end of last year is a good example; the tax savings that became available almost immediately to corporate America were certainly a catalyst for the market’s recovery from its first correction at the beginning of the year. In that light, the impact that midterm elections has on the market now could come from the government’s likely inability for the next couple of years to push any major changes.

    I’ve always believed that if there is anything the market really doesn’t like, and is most likely to react negatively to, it’s change. Investors like predictability, and we rely on measurements that offer a certain level of reliability to guide investment decisions. The status quo means that the things we use to drive our decisions remain relatively constant, and we don’t have to worry as much about changing our method or our approach. When something threatens to change the investing landscape, investors naturally get nervous.



    After eight years of a long, sustained bullish run that made a lot of investors think the easiest and best way to make money way in the stock market was to buy a passive index fund and just let it ride – “invest it and forget it,” if you will – the market rediscovered volatility this year. A big part of that was influenced by openly aggressive and confrontational politics from the Trump administration. Tariffs imposed every one of America’s largest and most important trading partners may indeed prove to have been the right move in the long run, but the tensions that came from seeing those long-standing trade relationships continue to keep the market on edge. A split government may not be able to put the cat back int the bag of things the Trump administration has already put back in place, the lack of consensus is also likely to make continued progress and changes that much harder to come by. The hope that the market seems to be keying on right now is that a natural check from a split House against the Oval Office could help restore the status quo and give investors a return at least some kind of  predictability that can help keep the stock market’s bullish trend in place.

    Assuming this happens, it’s entirely possible that the market could stage yet another broad-based rally to a new set of all-time highs. Which are the sectors that might be the biggest beneficiaries? I think there are two; here they are.



    Industrials

    While a divided House may blunt many of the reforms and initiatives the Trump administration still has plans for, one of the things that both sides seem to agree on is the need for improved infrastructure. A major spending bill may be hard to come by, but any progress on this front should act as a positive for this sector. Consider also that tariff and trade concerns have put major pressure on the sector throughout the year; even with the sector’s rebound since the end of October, which is about 10% from October 30th to now as measured by the SPDR Industrial Sector ETF (XLI), it remains down by a little over 10% from its 52-week highs. That gives the industry lots of room to rally even more, with increased chances that the absence of political complications could contribute even more.

    Semiconductors

    This sector has been one of the biggest underperformers throughout the year, as pricing and supply pressures among chipmakers have pushed stocks lower. A major argument for the President’s aggressive trade stance towards China has centered around the semiconductor industry and concerns about intellectual property protections and even theft. Many of the pricing pressures that have pushed semi stocks lower may not abate quickly. I also think, however that a changed political reality could force the Trump administration to try to make a trade deal with China more quickly than it might do otherwise; and I would expect that to provide at least an emotional reason for investors to start making new bets on a sector that has been beaten down by almost 15%, based on the Ishares Semiconductor ETF (SOXX) from its 52-week highs.


  • 05 Nov
    TTC has jumped 10.5% in the last week – should you ride the wave?

    TTC has jumped 10.5% in the last week – should you ride the wave?

    A few months ago, I wrote about the The Toro Company (TTC) to evaluate the stock as a potential value play based on the stock’s 18% decline since August of 2017. At the time, the stock has trading in the low $60 range, and hovering in a narrow, sideway price channel.  In late September, the stock dropped below that channel to establish a new 52-week low a little below $54 per share; but since October 26 the stock has seen an impressive rally, climbing to nearly $60 as of Friday’s close. More →

  • 24 Oct
    What is a good price for CAT?

    What is a good price for CAT?

    Yesterday marked another volatile day in the stock market, as the major indices posted big losses during the trading session – the Dow, for example bottomed out about 500 points below Monday’s close – but managed to claw back late to finish about .5% lower for the day. The market was chewing on a new round of earnings reports to mixed results. Caterpillar Inc. (CAT) was one of the biggest losers on the day, plunging more than 7.5% following its earnings report. More →

  • 11 Sep
    Why you shouldn’t fall for the value trap that is TEX

    Why you shouldn’t fall for the value trap that is TEX

    A couple of weeks ago, I wrote about Oshkosh Corporation (OSK), a mid-cap stock in the Heavy Machinery industry that is trading at a steep discount right now, and that I think looks like a pretty interesting value-based opportunity. The entire industry is pretty depressed right now, and you don’t have to look much further than the biggest names in the industry More →

  • 07 Sep
    Why SLCA’s 42% drop since May is a GOOD thing

    Why SLCA’s 42% drop since May is a GOOD thing

    Over the last four years, one of the most interesting segments of the economy to pay attention to has been the energy sector. That doesn’t mean following the biggest players in the the oil industry, although there have been some really interesting investing opportunities among those companies over the last couple of years. It also means keeping track of “energy-related” stocks. Like the smart entrepreneurs during the California Gold Rush More →

  • 29 Aug
    In wake of U.S.-Mexico agreement, OSK could be an interesting Industrial play

    In wake of U.S.-Mexico agreement, OSK could be an interesting Industrial play

    The big news this week has really been all about the announcement from President Trump that the U.S. and Mexico have agreed to enter a new trade deal that will effectively replace the longstanding NAFTA agreement between the two countries and Canada. The specifics of the deal still remain to be seen, since in many respects they haven’t been finalized; but so far it appears to focus heavily on the auto industry, expanding the criteria for how much of an automobile must be produced in North America to qualify for tariff protection, increasing the requirement for sourcing aluminum and steel from local producers, and specifying a minimum wage of $16 per hour for workers.

    Of course, Mexico is just one of several countries the Trump administration has been targeting for changes in trade policy and agreements; but the market seems to hope that they are just the first domino to fall and ease tensions between the U.S. and its largest trade partners, including Canada, the European Union and, perhaps most significantly, China. Steel and aluminum tariffs, which were the first to be imposed this year, now appear to be in position to also be the first to ease – a development that bodes well for the prospects not only of the auto industry but also of related industries, including heavy machinery.



    One of the challenges lately for investors interested in some of the largest players in the Heavy Machinery segment is that most of the most well-known companies, like Caterpillar (CAT) and Deere & Company (DE), are already pretty expensive, running at prices well above $100 per share. Oshkosh Corporation (OSK) is a somewhat smaller player in the industry, being categorized as a mid-cap stock versus the large-cap status of its larger brethren, and it has the added bonus of being available at a lower stock price; but don’t let its smaller size fool you. This is a company that recently celebrated 100 years in business, and offers a range of vehicles that cover construction, waste management, field service and access, military and emergency response and service vehicles. Like most Heavy Machinery stocks, OSK has dropped for most of the year and is currently down about 29% since hitting an all-time high at about $100; but with a strong fundamental profile and a promising value proposition, this looks like a stock that could present a good long-term opportunity.

    Fundamental and Value Profile

    Oshkosh Corporation (OSK) is a designer, manufacturer and marketer of a range of specialty vehicles and vehicle bodies, including access equipment, defense trucks and trailers, fire and emergency vehicles, concrete mixers and refuse collection vehicles. The Company’s segments include Access Equipment; Defense; Fire & Emergency, and Commercial. The Access Equipment segment consists of the operations of JLG Industries, Inc. (JLG) and JerrDan Corporation (JerrDan). The Defense segment consists of the operations of Oshkosh Defense, LLC (Oshkosh Defense). The Fire & Emergency segment consists of the operations of Pierce Manufacturing Inc. (Pierce), Oshkosh Airport Products, LLC (Airport Products) and Kewaunee Fabrications LLC (Kewaunee). The Commercial segment includes the operations of Concrete Equipment Company, Inc. (CON-E-CO), London Machinery Inc. (London), Iowa Mold Tooling Co., Inc. (IMT) and Oshkosh Commercial Products, LLC (Oshkosh Commercial). OSK has a current market cap of about $5.2 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by about 19.5%, while revenue increased almost 7%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long-term; but it is also a positive mark of management’s ability to maximize its business operations effectively. The company operates with a narrow operating margin; over the last twelve months, Net Income was about 5.5% of Revenues. This number increased in the last quarter to a little above 7%.
    • Free Cash Flow: OSK’s free cash flow is healthy, at more than $253 million. This number has increased steadily since early 2017, from below zero.
    • Dividend: OSK’s annual divided is $.96 per share, which translates to a very impressive yield of 1.34% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for T is $33.11 and translates to a Price/Book ratio of 2.15 at the stock’s current price. The stock’s historical average Price/Book ratio is 2.14, meaning that the stock is practically at par with its Book Value. That doesn’t sound like there is much room to grow; but another measurement that I like to use to complement my analysis is the stock’s Price/Cash Flow ratio; in the case of OSK, the stock is trading more than 82% below its historical Price/Cash Flow ratio. While a target price at nearly $130 is probably not realistic – the stock only hit $100 for the first time in January of this year – it does imply that there is good reason to suggest the stock’s January highs are well within reach.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s upward trend until the beginning of this year; it also informs the Fibonacci trend retracement lines shown on the right side of the chart. It’s easy to see the downward trend the stock has followed for most of this year; however it is also interesting to note that since late June, the stock has shown some resilience, with support in the $69 range and short-term resistance at around $75 per share. The stock would need to push above this range to begin forming a new upward trend, while a drop below $69 could see the stock drop to as low as the $56 level as shown by the 88.6% Fibonacci retracement line.
    • Near-term Keys: The stock would need to break above $75 to give a good bullish signal that you could act on, either for a short-term, momentum-based trade with call options, or to buy the stock outright with a plan to hold for a longer period of time. A drop below $69 could be an opportunity to work the bearish side by shorting the stock or by buying put options.


  • 03 Aug
    Why CAT’s 20% drop could be a value trap

    Why CAT’s 20% drop could be a value trap

    When you put a big part of your investing focus on bargains, emphasizing value-based fundamental analysis to determine whether a stock is worth your time and money, you inevitably end up filtering through a lot of different stocks, but cast most aside. I think that is useful, because being more selective helps you narrow the universe of stocks you’re paying attention to at any given time. The problem, however is that sometimes the metrics a value investor learns to rely on can give you a false sense of whether a stock really fits a good description of a good value. That can lead you to make an investment in a stock that might be down from a recent high because it looks like it’s available now at an attractive price compared to where it was; but in reality it’s a bit like trying to catch a falling knife – the only real way to avoid getting cut is to get out of the way and let the knife fall to the floor. These kinds of situations are also called value traps, because they provide numbers that lure less careful investors in and motivate them to make an investment at some of the most dangerous times possible.

    I think Caterpillar Inc. (CAT) is actually one of those traps right now. My opinion differs from most other analysts and “experts” out there, who point to the company’s solid earnings growth over the last year, and the stock’s decline in price since January of this year of more than 20% as reasons that investors should be treating the stock as a great value opportunity right now. They’ll also point to a popular valuation metric, a stock’s P/E ratio, as a clear indication that the stock is undervalued and something you should be paying attention to right now. I’ll admit that at first blush, I thought the stock might be a good opportunity, too; but the more I drilled down to really look at some of the other data points that are important to me, the more concerned I got.



    Another risk element that investors seem to be trying to shrug aside right now when it comes to stocks like CAT is the fact that while the U.S. seems to have found some sense of resolution – or at least a path to it – in trade with the European Union, the same can’t be said of discussions with China. Today, on top of existing tariffs that already amount to more than $34 billion against its single largest trading partner, President Trump proposed another $200 billion in new tariffs, prompting what seems like the customary Chinese response to retaliate in kind. The market’s reaction was pretty ho-hum; could it mean the investors are beginning to accept trade tension as a normal state of affairs? If they are, then I think it means they are becoming desensitized to that risk, and that is a troubling indication all by itself.

    Multinational stocks, and especially those with major operations in China, remain at risk if trade tensions continue as they are, or escalate even further. And let’s not forget that while the E.U. have, for now at least, agreed to hold off on further tariffs against each other and work toward compromise, it doesn’t mean that situation has been resolved. CAT is one of the companies that I think could be the most dramatically affected. That affect may not be showing up in earnings reports or sales numbers yet; but the risk that it will increases more and more with every week, month, and quarter that continues with trade affairs as they are. To my way of thinking, that puts something of a jaundiced eye on any currently glowing numbers. Just about every analyst report I’ve been able to find on CAT forecasts stable to growing revenues along with continued earnings growth for the foreseeable future, and under most circumstances I think that should be a good thing; but the thing that is setting off warning bells for me is that none of the reports I have found discuss trade or tariffs as risk factors.



    Fundamental and Value Profile

    Caterpillar Inc. (CAT) is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The Company operates through segments, including Construction Industries, which is engaged in supporting customers using machinery in infrastructure, forestry and building construction; Resource Industries, which is engaged in supporting customers using machinery in mining, quarry, waste and material handling applications; Energy & Transportation, which supports customers in oil and gas, power generation, marine, rail and industrial applications, including Cat machines; Financial Products segment, which provides financing and related services, and All Other operating segments, which includes activities, such as product management and development, and manufacturing of filters and fluids, undercarriage, tires and rims, ground engaging tools, fluid transfer products, and sealing and connecting components for Cat products. CAT has a market cap of $82.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings grew by almost 100%, while sales growth was almost 24%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize their business operations. Net Income as a percentage of Revenues also improved from about 6% for the trailing twelve months to more than 12% in the most recent quarter.
    • Free Cash Flow: CAT’s free cash flow over the last twelve months is more than $3.7 billion. Cash and liquid assets are also more than $7.8 billion, which does give the company quite a bit of financial flexibility; however these numbers are offset in my analysis by the stock’s very high debt to equity ratio
    • Debt to Equity: CAT has a debt-to-equity ratio of 1.59. Their long-term is more than $23.5 billion and marks CAT as one of the most highly leveraged companies in the Heavy Machinery industry.
    • Dividend: CAT currently pays an annual dividend of $3.44 per share, which translates to an annual yield of 2.49% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CAT is $24.99 per share. At the stock’s current price, that puts the Price/Book ratio at 5.52, versus a historical average of 3.62. The historical average puts the stock’s “fair value” a little above $90 per share – more than 34% below the stock’s current price. Some analysts like to point out that the stock is trading about 32% below its historical Price/Earnings ratio as an indication the stock is undervalued, but I view Book Value, and the Price/Book ratio as a better measurement and more indicative of a company’s intrinsic value.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend until January of this year and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock’s decline from late January’s high at around $173 puts the stock in a clear, intermediate-term downward trend, with the stock trading near to the lowest point of that trend around $135 per share. The stock is hovering around a major support point, marked by the 61.8% Fibonacci retracement line, and if that line holds, it could give the stock some momentum to start pushing higher to reclaim its highs from earlier in the year. On the other hand, a drop below $135 would mark a clear break through support that would give the stock room to drop as far as the 88.6% retracement line around $120 in fairly short order. That’s more than $15 of near-term risk if support is broken, and about $18 of legitimate risk right now. Even if the stock does rally from that support point, it should find major resistance in the $150 range, where the 38.2% retracement line sits, meaning that a bullish investor stands to make about $12 per share if he’s right; but he could lose $18 per share if he’s wrong. That’s easy math that should make anybody hesitate.
    • Near-term Keys: If you’re looking for a good reward: risk trade opportunity for CAT, watch to see if the stock pushes below support around $135. If it does, there could be a very good opportunity to short the stock or use put options, with a target price around $120, and a stop loss a little above $136 per share. That’s a set up that offers $15 of reward, against only a couple of dollars per share of risk.


  • 25 Jul
    TTC is down 18% for the year, and consolidating. Is it a great buy?

    TTC is down 18% for the year, and consolidating. Is it a great buy?

    President Trump Made A “Promise” To Americans 30 YEARS ago???

    UNBELIEVABLE: Before he was President Trump, “The Donald” went on Oprah and made THIS shocking “promise” to Americans… And KEPT it. 30 years later, hardworking Americans have been able to cash “Trump Bonus Checks” for $4,280… $6,344… and even an exceptional $8,181 per month!

    Read More

    One of the biggest challenges all investors face is finding stocks to invest in. It isn’t just about picking a stock out of the thousands that are available, but also trying to figure out when the time is right to make the investment. Momentum and trend traders like to try to time the swings from high to low extremes within price trends to place short-term trades, while investors with a longer time period in mind usually look at the fundamental strength of the underlying business. Value-oriented investing, which is the approach I prefer and write about, incorporates aspects aspects of both trend and fundamental analysis to determine if a stock’s current price is lower than it should be. It doesn’t mean the stock is guaranteed to go up, of course, but it does provide a pretty good way to build a case for whether a stock is worth the bother right now, later, or even at all.

    The Toro Company (TTC) is an interesting case study. This is a mid-cap Machinery company with an easily recognizable brand; if you mow your lawn, enjoy gardening or landscaping, or have to deal with snow in the winter, there’s a good chance you are familiar with their products. TTC competes with other companies in the Machinery space like Deere & Co. (DE) and Briggs & Stratton (BGG), to name just a couple. Their business has a definite element of seasonality associated with it; in their most recent quarterly earnings report, for example, the company cited a more-temperate-than-expected winter, in many parts of the country along with a delayed start to spring as factors that impacted revenues and earnings in the quarter. Even so, the company also has a diverse product portfolio that makes them an interesting player. The stock’s price is also down for the last twelve months, having hit a high price at around $73 in August of last year before dropping quickly to a range somewhere between $56 on the low side and around $62 on the high end. The stock is roughly the middle of that range right now and has been holding this sideways pattern for the past few months. 

    The stock’s current, and somewhat extended, sideways pattern marks a consolidation of price that usually gets technical traders to start paying a little more attention, since stocks inevitably find a reason to break out of consolidation ranges to establish new trends. When the stock is trading significantly below its historical levels, technical traders usually look at a consolidation pattern as a bullish indication and will start looking for a strong upside breakout signal to place a trade. As a value investor, consolidation makes me check a stock’s fundamentals to determine if there is a strong argument that the stock should move higher over either an intermediate or long-term perspective, and if the value proposition isn’t compelling enough right now, what is the price at which I think the stock is a good buy.



    Fundamental and Value Profile

    The Toro Company (Toro) is engaged in the designing, manufacturing, and marketing of professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products. The Company operates through three segments: Professional, Residential and Distribution. Under the Professional segment, Toro designs professional turf, landscape and lighting, rental and specialty construction, snow and ice management, and agricultural products. The Residential segment provides products, such as riding products, home solutions products and snow thrower products. It manufactures and markets various walk power mower models. The Distribution segment consists of Company-owned domestic distributorship. Its brands include Toro, Exmark, BOSS, Irritrol, Hayter, Pope, Unique Lighting Systems and Lawn-Boy. TTC’s current market cap is $6.3 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 11% while revenue growth was mostly flat, posting an increase of .29%. TTC operates with a narrow margin profile of about 1%. The results are more encouraging over the last quarter, where earnings grew 150% and revenues improved almost 60%. In addition, the company’s Net Income was about 10% over the past year, but improved to almost 15% in the last quarter.
    • Free Cash Flow: TTC’s free cash flow is healthy, at a little more than $257 million. This is a number that has declined over the past year from a little above $340 million.
    • Debt to Equity: TTC has a debt/equity ratio of .48. Their balance sheet shows about $206 million in cash and liquid assets versus about $300 million in long-term debt, which a pretty good indication that the company works with a conservative debt management philosophy. Given their healthy operating margins, they should have no problem servicing their debt.
    • Dividend: TTC pays an annual dividend of $.80 per share, which translates to a yield of about 1.33% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for TTC is $5.81 and translates to a Price/Book ratio of 10.29 at the stock’s current price. Their historical average Price/Book ratio is 9.96, which provides a pretty strong argument for the fact that while the stock isn’t overvalued, it also isn’t a great value right now. I’m also not confident that under current conditions, with some early signs that steel and aluminum tariffs are starting to squeeze margins for industrial stocks, that the market is likely to start rotating into these stocks in the near future. A more compelling value argument in my mind would be made with the stock in the $45 to $46 range – which is a level the stock hasn’t seen since late 2016.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s long-term downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. As I observed earlier, the stock is currently hovering in a range between about $56 (range support) and $62 (range resistance). That range has been pretty persistent since April of this year. In order to reverse its long-term downward trend, the stock would need to break out of that range and move above the $63 area marked by the 38.2% retracement line. A break below $56 would reconfirm the long-term trend’s strength and could see the stock drop down into the $46 to $49 range.
    • Near-term Keys: If you’re looking for a way to take advantage of the bullish side of the market with TTC, look for a strong move above $63 before buying the stock or working with call options. If the stock does break below $56, that could be a good signal to short the stock or to consider buying put options. If you’re a value-oriented investor like me, a break below $56 could be a good reason to start paying closer attention, with stabilization below $50 an area where the stock’s value proposition could become very attractive.


  • 13 Jul
    HOG could be a good value play even with a trade war

    HOG could be a good value play even with a trade war

    At the end of May, steel and aluminum tariffs on the European Union, Mexico and Canada were imposed by the Trump administration amid a whirlwind of criticism, coming from all three countries and from just about every mainstream news media outlet as well. In the long run, the actual effect of these tariffs, and others levied against China remains to be seen, but as investors, it’s important to understand that no matter what the long-term outcome will be, good or bad, in the short term the markets will inevitably interpret any kind of conflict in trade as a negative thing. That interpretation manifests in daily market activity as uncertainty and volatility, and so it isn’t surprising that many of the industries that either produce steel and aluminum, or that rely on the material for their finished products, have been under some pressure.

    Harley Davidson, Inc. (HOG) is one of the stocks that has really been under pressure throughout the year, and the tension over tariffs certainly hasn’t helped matters. One of just a few worldwide brands that can truly be considered “an American icon,” the stock opened the year at around $52 and climbed as high as about $56 before dropping back to a low around $40 at the beginning of May. The imposition of steel and aluminum tariffs actually gave the stock a temporary boost, lifting it to about $46 in late June before it dropped back to its current level a little shy of $43.

    Over the last week or so, the company has come under fire from Trump himself by deciding to move its international manufacturing operations out of the U.S. Management has even attributed at least a portion of the decision to tariffs, since most of the countries targeted by the U.S. have responded in kind. Offshoring their international manufacturing should give the company a way to avoid export tariffs to key markets like Europe, but it has also drawn ire from the President, since the move threatens U.S. manufacturing jobs (although the company has not indicated any existing jobs would be lost). The negative press is one of the prime reasons the stock has dropped back near to its 52-week lows, but that drop also creates a pretty interesting opportunity for value-oriented investors. I think the fact the company is willing to think, and act proactively to address issues that it believes will impact its ability to do business is a positive in the long run. Call this an “anti-Trump” play if you want, but if the trade war doesn’t get resolved in what businesses feel is a reasonable period of time, and it really does starts to effect corporate growth, we may see other companies following HOG’s lead.



    Fundamental and Value Profile

    Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two segments: the Motorcycles & Related Products (Motorcycles) and the Financial Services. The Motorcycles segment consists of HDMC, which designs, manufactures and sells at wholesale on-road Harley-Davidson motorcycles, as well as motorcycle parts, accessories, general merchandise and related services. The Company manufactures and sells at wholesale cruiser and touring motorcycles. The Financial Services segment consists of HDFS, which provides wholesale and retail financing and insurance-related programs to the Harley-Davidson dealers and their retail customers. HDFS is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans for the purchase of Harley-Davidson motorcycles. HOG has a current market cap of $7.1 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased 18%, while sales increased only about 2.65%. Over the last quarter, both numbers are quite a bit more encouraging, with earnings more than doubling versus the quarter prior, and sales increasing more than 30%. Also, over the trailing twelve months, Net Income was a little less than 10% of Revenue, while over the last quarter it increased to a little over 11%.
    • Free Cash Flow: HOG’s Free Cash Flow is healthy at about $826 million. Their available cash and liquid assets also increased over the last quarter by more than 10%.
    • Debt to Equity: HOG has a debt/equity ratio of 2.06. While this number decreased in the last quarter, HOG remains one of the most highly leveraged companies in its industry. Their balance sheet indicates that operating profits are more than sufficient to service their debt.
    • Dividend: HOG pays an annual dividend of $1.48 per share. At the stock’s current price, that translates to a dividend yield of 3.46%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for HOG is $11.85 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.6.  That’s a bit higher than I usually like to see, but the average for the Automobiles industry is 4.6, while the historical average for HOG is 4.5. A move to par with its historical average would put HOG a little above $53 per share, almost 25% higher than its current price.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s decline from its 52-week high at nearly $56 per share to its downward trend low in early May around $39. The stock picked up bullish momentum from that point to rally to a short-term high at around $46 per share before dropping back to around $40 in late June. The stock appears to have been building some positive momentum from that point. The horizontal red lines on the right side of the chart mark Fibonacci retracement lines based on the highlighted downward trend; the first line, around $46 is the 38.2% retracement level, which usually acts as a pretty significant inflection point. If the stock can break above resistance at that level, I expect to see the stock rally near to the 61.8% retracement line around $50. A break above $46 would also mark a reversal of the downward trend and should give the stock room to rally to the $53 to $54 level. Immediate support is around $40, and a break below that point could see the stock drop into the mid-$30 range, which is where the next likely support from historical pivots points lies.
    • Near-term Keys: If you’re looking for a short-term bullish bump, wait to see if the stock can break above $46 per share. A strong break, with good buying volume would act as a good signal to buy the stock or work with call options. If you’re willing to work with a long-term investment, the fundamentals and value proposition are strong enough to warrant taking a position immediately. If you prefer to follow the direction of the current downward trend and work with the bearish side, wait to see if the stock drops below $40. A move to $39 would be a good indication to short the stock or start working with put options.


  • 29 Jun
    HON is down 12% from this year’s high. Is it time to buy?

    HON is down 12% from this year’s high. Is it time to buy?

    Honeywell International Inc. (HON) is one of the largest industrial companies in the U.S. They’ve been around for more than a hundred years and have been a component of the S&P 500 index since 1964. This is a bellwether stock with global operations that, like most U.S. companies, has ridden the market’s long-term upward trend to post amazing highs. It hit a low point below $27 in February 2009 but from that point began a steady climb that peaked in January of this year at almost $165 per share. That’s an increase of more than 500% over that period that anybody would have been thrilled to get a piece of. Since that point, however, the stock has dropped back about 12%, which in the longer-term context probably doesn’t sound that alarming. It does, however beg the question: is the run over, or is this just another example of an opportunity to “buy the dip” and ride the next wave?

    Fundamental measurements for this company are, not surprisingly, quite solid in most respects. As I’ll demonstrate below, however, I believe the stock is highly overvalued by most reasonable metrics. Being overvalued by itself doesn’t, of course mean the stock is destined to keep dropping; however when you consider that the stock is down since January, but remains overvalued does suggest there is still plenty of room to keep dropping. Add in to the mix that the company is among the companies that really stand to be negatively impacted by a trade war – they have operations all over the world, with more than 50% of their sales being generated outside the United States. The longer the U.S. and its trading partners remain at odds and choose to escalate trade tensions rather than finding a way to negotiate their way to compromises, the more the risk that companies like HON could see their stock prices continue to fall.



    Fundamental and Value Profile

    Honeywell International Inc. is a technology and manufacturing company. The Company operates through four segments: Aerospace, Home and Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. The Company’s Aerospace segment supplies products, software and services for aircraft and vehicles that it sells to original equipment manufacturers (OEMs) and other customers. The Home and Building Technologies segment provides products, software, solutions and technologies that help owners of homes stay connected and in control of their comfort, security and energy use. The Performance Materials and Technologies segment is engaged in developing and manufacturing materials, process technologies and automation solutions. The Safety and Productivity Solutions segment is engaged in providing products, software and connected solutions to customers that manage productivity, workplace safety and asset performance. HON has a current market cap of $108.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing a little over 17% while sales increased about 9.5%. Growing earnings faster than sales is difficult to do, and is generally not sustainable in the long term, but it is also a positive mark of management’s ability to effectively maximize the company’s business operations.
    • Free Cash Flow: HON has very healthy free cash flow of more than $5.2 billion over the last twelve months. This is a number that has climbed steadily on a yearly basis going all the way back to the last quarter of 2011.
      Debt to Equity: the company’s debt to equity ratio is .72, which is a pretty conservative number. Their balance sheet shows operating are sufficient to service their debt, with plenty of cash and liquid assets to make up any shortfall and provide additional financial flexibility.
    • Dividend: HON pays an annual dividend of $2.98 per share, which at its current price translates to a dividend yield of 2.05%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for HON is $23.80 per share. At the stock’s current price, that translates to a Price/Book Ratio of 6.09. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Industrial Conglomerate industry is only 3.7, and even more importantly, the historical average for HON is 4.6. A value at par with the industry average would put the stock at around $88 per share, and at its historical average it would be $109.48. That means that from a value standpoint, the downside risk is either 25% or nearly 40%, depending on which metric you prefer to use. Either way, the stock is clearly overvalued and would be very hard to justify as any kind of value-based investment.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

    • Current Price Action/Trends and Pivots: The red, diagonal line traces the stock’s upward trend trend dating back to October of last year. It is also the basis for calculating the Fibonacci retracement lines on the right side of the chart. The stock has been holding practically on top of the 38.2% retracement line since April, and could be forming a third consecutive pivot low at that level right now. This could mark the beginning of a Triple Bottom formation, which is usually taken as a positive, bullish pattern; however the stock would have to break above the $152 level, which I’ve marked with the dashed yellow line and is which has also been acting as powerful resistance for the the past four months. A break above that level should provide bullish momentum to as far as $165, which is around the stock’s all-time highs. A break below $142, which is where the stock’s current support lies should be taken as a good indication the stock is indeed reversing its long-term upward trend.
    • Near-term Keys: If the stock breaks below $142 as just mentioned, and some of the broader market’s trade war and other global risks remain in place, I believe the stock could easily drop to as low as $128 before finding any kind of significant support. A drop to that level would also translate to a legitimate downward trend that could keep the stock dropping to somewhere between $105 to $110 per share – which would match the current minimum downside risk my earlier value analysis suggests. These could be opportunities for shorting the stock or working with put options. If the stock does recover bullish momentum and manages to break the $152 level, there could be an attractive opportunity to work with the long side by either buying the stock outright or using call options.


1 2