Industrial Sector: Monthly Update And Valuations

|
Includes: BA, CMI, EMR, ETN, GE, HON, LMT, QQQ, SPY, WM
by: Steven Bauer

This article will give you a mini-perspective on my process of breaking down the industrials to find profits. The pieces of the puzzle of my analytics are the companies. Each company belongs to an industry group, and each industry group is part of a sector. Now with a few more analytic tools we can start to make consistent annual profits.

I will repeat this article on the industrial sector from time to time with updates, i.e. Alerts (for buying) and Warnings (for selling) for the eight companies listed below. My list of these eight companies is a representative group of large-cap industrial companies that should be familiar to all.

The market continues to do what it loves to do. Lately, that means it is both fundamentally and technically very fickle. What many investors often forget is that what appears to be a fact is (in reality) very creative fiction. The fictional stories are often so compelling that the average investor takes them; hook, line and sinker. That's a fact and, for me, it is a very sad commentary. You deserve better from the writers, and I am trying to do just that.

Global Economic Crisis - - (mini-tutorial on when it all started)

Few investors understand that this thing is global. It is definitely not just Greece and Europe. The world economies are in more economic peril than you might think. The Global economic decline has been in process for longer than many people believe. It will continue for the foreseeable future and have a lasting effect on generations to come.

It was too subtle to recognize in the late 1990s when the first bubble broke, and the stock market lost 50% of its value. Economists and the financial gurus first recognized the problems in the middle of 2007 and into 2008. Since then, and around the world, stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.

On the one hand, many people are concerned that those responsible for the economic problems are the ones being bailed out. On the other hand, the global financial meltdown has affected the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided if ideologues supporting the current economics models weren't so vocal, influential and inconsiderate to others' viewpoints and concerns.

Following a period of economic boom, a negative financial bubble (global in scope) has now exploded.

A collapse of the U.S. sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, serious weaknesses in the global financial system have surfaced. Many financial products have become so complex and twisted, that the system has begun to unravel, and trust started to fail.

Eight Valuation Notes on the Industrial Sector

Earnings Growth: The industrial sector earnings peaked at in 2010 and has declined ever since.

Price per Share: It recovered from devastating losses beginning in 2008. The recovery from 2009 to date is less than its value peak in 2007 and declining. My forecast: Down again for the foreseeable future. Industrials have fallen by over 10% since early 2010.

Forward Earnings: The industrial sector is flat to slightly up for the foreseeable future.

Forward Revenue: The industrial sector's revenue is continuing to decline from 2010.

Forward Profit Margin: Profit Margins have been turning over the top since early 2011.

Forward Price / Earnings Ratio: P/Es are on the decline since 2010 and have turned down again.

Long-Term vs. Short-Term Earnings Growth: Longer term is flat, but the Short term has been declining since early 2011.

PEG Ratio: Industrial sector PEGs are currently under 1.0 and falling.

Valuation Analytics Table - - Eight Large Cap Industrial Companies

Symbol

Price

Valuation Divergence (%)

Six Months - One Year Projected from a Mean - Sigma and from the next Bullish or Bearish Inflection Point.

(these are averaged for all companies and conservative numbers )

Guidance

(My General Remarks for the Industrial Sector are: I never invest when the trend is against me. Currently, the trend is bearish; therefore, in many good valuations, I prefer holding cash. )

General Electric Co. (NYSE:GE)

( chart )

$19.00

Minus - 15+%

Cash is your friend in a bearish cycle of the stock market.

Boeing Co. (NYSE:BA)

$70.00

Minus - 15+%

When the pull back begins again even the biggest and not so bad companies get eventually hurt. Stay in cash.

Honeywell Int'l (NYSE:HON)

$56.00

Minus - 15+%

There will be more pull back so, stay in cash.

Emerson Electric Co. (NYSE:EMR)

$47.70

Minus - 15+%

There will be more pull back so, stay in cash.

Lockheed Martin Corp. (NYSE:LMT)

$83.00

Minus - 15+%

The pull back may be modest but caution is advised. Stay in cash.

Cummins, Inc. (NYSE:CMI)

$97.00

Minus - 15+%

CMI has already been hurt bad but there is more downside. Stay in cash for now.

Waste Management, Inc. (NYSE:WM)

$32.50

Minus - 15+%

A very poor mover and not a good hold. Find a better company for your portfolio. Stay in cash.

Eaton Corp. (NYSE:ETN)

$41.00

Minus - 15+%

Currently it is down 20% and will come lower. Stay in cash.

Click to enlarge

Click to enlarge

Click to enlarge

(Click charts to enlarge)

Market Status

I use several indices in my focus to identify the ongoing bullish and bearish inflection points. The New York Composite Index is represented well by the ETF, SPDR S&P 500 (NYSEARCA:SPY). The Nasdaq Composite Index is represented well by the ETF, PowerShares QQQ Trust (NASDAQ:QQQ). In my work the identification of bullish and bearish inflection points is of critical importance. Because this is so critical, I also emphasize and use market "breadth" indices. Breadth does not have a tracking ETF; therefore, it was necessary to create my own excel charts.

These two indices, backed up with 'breadth,' is the foundation for my technical analysis. An axiom for the general market says: "the direction (trend) of the general market has a 60% influence on security's profits or losses." The following two charts (long and short term) include SPY, QQQ and two of the companies presented in this article. I hope you can understand why this analytic exercise is so important to my way of managing assets.

Click to enlarge

Click to enlarge

My opinion is that the fundamentals are overvalued; the technicals are overbought, and the consensus opinion is way too bullish. I am currently a bear because my valuations are convincingly negative, and we are in a bearish cycle; it's just that simple!

Further support for my guidance for the general market can be read in my weekly Instablog article "Wednesday - General Market Update & Commentary."

Summary

Currently, the above tables and charts present a clear and not-so-positive account of these eight companies and the overall market indicators. It is a fact that, the stock market cycles endlessly both fundamentally and technically from bullish to bearish and then back to bullish again. Unfortunately, this is a pattern that is not well understood or taken advantage of by most investors.

Within this present bearish time frame, there is nothing (longer-term) wrong with these companies. It is simple what happens when they turn bearish, and is just the ongoing "cycling effect" of the way the stock market works. I hope you understand and will continue to follow my work / analytics. It won't be long before I can offer you a bullish and upbeat forecast once again.

May I remind you to take a few minutes to study my 10- and 20-year charts? When buying or selling, taking a longer-term view of a security's price history is often the difference between profits and losses!

Conclusion

I am bearish on both the world economies and the general market. My more recent Instablog postings are focused on securities that should not be currently held in your portfolio. I suggest that it is vitally important for you to understand that holding cash during questionable time frames in the marketplace is a much wiser choice than holding your present positions. I can assure you that; this is definitely a "questionable" time frame!

Further and on-going support for some of these companies' current status will be posted this coming Saturday. My "Saturday Update" can be read weekly in my Instablog article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.