The Industrial Sector SPDR Fund (XLI) was down 1.1% during the June 2011 quarter, while the S&P 500 (SPY) was down half a percent. The sector includes companies involved in such industries as aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, machinery, commercial services and supplies, air freight and logistics, airlines, marine, road and rail, and transportation infrastructure companies. Of the approximately 850 stocks in the industrial sector (as defined above), 74 stocks trading above $1 at closing on June 30th went down more than 25% during the quarter and another 27 went up more than 25% during the quarter (see Table). These stocks were analyzed to determine if they would continue in the same direction, or if they would reverse their moves going forward. The following are the best buy and sell ideas based on that analysis.
Buy Gafisa SA Ads (GFA): GFA is a Brazilian builder of residential homes and communities and commercial structures across Brazil. Over the last fifty years, it has been recognized as one of the foremost professionally managed homebuilders, having completed and sold more than nine hundred developments and constructed over four hundred million square feet of housing in Brazil. It was down 26% in the June quarter, and it is down 41% YTD.
GFA trades at a 9 price-to-earnings ratio (P/E) on trailing-twelve-month (TTM) basis and at a forward P/E of less than 5, in the lower one-third of its historic P/E range. Revenue and earnings are projected to increase from $2.15 billion and $1.12 in 2010 to a projected $2.82 billion and $1.44 in 2011 and $3.18 billion and $1.78 in 2012. The stock is down 53% from the $18.24 highs in October 2010, mostly on account of high inflation, interest rate hikes by the central bank, and a 40% cut in the government outlay for low-income housing. Furthermore, recent weakness below the $12-$14 range can be attributed to the most recent March 2011 quarter report when the company reported 4 cents in earnings, well short of the analyst consensus estimate of 20 cents.
At issue is whether one believes that the Brazilian real estate market is a bubble, and whether when the party ends will it be a soft landing or a hard one like in the U.S. We believe that overall the Brazilian economy is strong and the strength in the real estate market, although not without bumps, is sustainable, fueled by an expansion of the middle class and lower unemployment numbers. While it is difficult to precisely call the bottom, we believe that the sell off is overdone and that GFA shares are now attractively priced to be bought. We would take a small position here and add to it stages to take advantage of any further weakness in the price. Analyst targets for GFA are a mean of $12-$13, with a high above $15, well above the current price in the $8.50s; and of the three analysts that cover the company, one rates it a strong buy, one a buy, and the last one rates it at hold.
Buy Velti Plc (VELT): VELT provides mobile marketing and advertising that enable brands, advertising agencies, mobile operators and media companies to implement targeted, interactive and measurable ad campaigns via mobile devices. It was up 34% in the June quarter, and it is up 143% YTD.
VELT trades at a forward 30 P/E, at a discount to its growth rate projected at 50% for the next two years. Specifically, revenue and earnings are projected to increase from $116 million and 4 cents loss in 2010, to a projected $174 million and 39 cents earnings in 2011, and $254 million and 64 cents earnings in 2012. Analysts project a mean target of $23, with a high of $24; and of the five analysts that cover the stock, three rate it strong buy and two rate it at buy. The company is one of the few pure-plays on the forthcoming mobile tsunami, a revolution that is expected to dwarf both the computing and internet revolutions. As such, the stock represents a rare opportunity to capitalize on this revolution, and the stock at some point may break from fundamentals and just trade based on the supply and demand. We believe that current prices are attractive enough to buy, and would start building a position in stages, taking advantage of any weakness by adding more shares.
Other Big Movers: Other prominent big movers in the industrial sector in the June 2011 quarter include:
- Companhia Siderurgic Ads (SID), a Brazilian producer of galvanized, hot and cold rolled and tin mill steel products for the automobile, civil construction, packaging, home appliances, and original equipment manufacturing applications in Brazil and internationally. It was down 25% in the June quarter.
- YRC Worldwide Inc. (YRCW), a provider of asset and non-asset based transportation services across the U.S., Puerto Rico, Canada, Guam and Mexico, via its brands iYellow Transportation, Roadway, Reimer Express, USF Holland, USF Reddaway, USF Glen Moore and New Penn. It was down 35% in the June quarter.
- General Maritime Corp. (GMR), a provider of international seaborne crude oil transportation services in the Atlantic Basic with a fleet of 31 vessels. It was down 34% in the June quarter.
- Hovanian Enterprises (HOV), a builder of single-family detached homes, attached town-homes and mid-rise/high-rise condominiums in 18 states across the U.S. under the trade names K. Hovnanian Homes, Matzel & Mumford, Brighton Homes, Parkwood Builders, Town & Country Homes, Oster Homes and CraftBuilt Homes. It was down 32% in the June quarter.
- Frontline Ltd. Adr (FRO), a provider of tanker transportation services of oil and oil products through a fleet of 76 vessels. It was down 41% in the June quarter.
- Eagle Bulk Shipping Inc. (EGLE), a provider of international tanker transportation charter services for dry bulk goods through a fleet of 38 vessels. It is the largest U.S. based owner of Handymax dry bulk vessels that range in size from 35,000 to 60,000 deadweight tons or dwt, and transport a broad range of major and minor bulk cargoes, including iron ore, coal, grain, cement and fertilizer, along worldwide shipping routes. It was down 33% in the June quarter.
- Horizon Lines Inc. (HRZ), a provider of container shipping and integrated logistic services with a fleet of 20 vessels and 31,000 cargo containers. It was up 42% in the June quarter.
- Genco Shipping & Trading (GNK), a provider of international tanker transportation services for iron ore, coal, grain and steel with a fleet of 49 vessels. It was down 30% in the June quarter.
- Excel Maritime Carriers (EXM), a provider of international tanker transportation services via a fleet of 47 dry-bulk carriers for dry bulk cargo such as iron ore, coal and grains, as well as bauxite, fertilizers and steel products. It was down 28% in the June quarter.
- Beazer Homes USA Inc. (BZH), a builder of single and multi-family homes in the West, Southeast, East and other regions of the U.S. spanning 15 states. It was down 26% in the June quarter.
- Temple Inland Inc. (TIN), a manufacturer of containerboard, corrugated packaging, lumber, particle-board, gypsum wallboard and fiberboard. It was down 27% in the June quarter.
- Harbin Electric Inc. (HRBN), a Chinese manufacturer of electric motors, including industrial rotary, linear, and specialty motors. It was down 27% in the June quarter.
Of these, GFA, HOV and FRO are being accumulated by high alpha or guru funds that have a long-term track record of beating the market averages. In contrast, SID, LFT and TIN are under distribution by guru funds based on the latest available March 2011 quarter 13-F filings. Furthermore, guru funds have no ownership in YRCW, EGLE and EXM.
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Credit: Historical fundamentals including operating metrics and stock ownership information were derived using SEC filings data, I-Metrix® by Edgar Online®, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.