Last week's Barron’s article “Others May Catch GE’s Industrial Disease” cites Goldman options strategists John Marshall and Stuart Kaiser as recommending clients to buy puts on the Select Sector Industrial SPDR (XLI), a ETF that’s supposed to track the industrial sector. The recommendation was to buy XLI June 36 puts, which were trading around $1.10 while the XLI was trading at $37.37 at the time of the article. Marshall and Kaiser’s report cited the following reason (which I think is totally ridiculous):
“The GE earnings miss and guidance revision last week highlights how the increasingly weak macro environment can quickly sneak up on even the most diversified and well-run of industrials businesses,”
My biggest problem with this recommendation is the XLI is about 18% GE (making the XLI basically a lite GE play), its kind of late to buy the puts AFTER GE took that dive from $37ish to$32ish! And why did GE take that big plunge? It sure wasn’t because GE is an industrial. It was because we found out GE was more of a financial than an industrial where GE’s financial unit took GE’s earnings per share down by 7 cents and negated any positives the industrial units were producing.
None of the other components in the XLI has any financial units like GE (hence they’re true industrials, unlike GE). After listening to GE’s call, one should actually be bullish on export industrials. GE cited very strong infrastructure businesses, mostly abroad, and in the same industries we’ve known to be hot: oil & gas, energy generation, power, and aerospace. Oh, and the weak dollar kicker has been huge!
The hits the true industrials took off of GE were great opportunities to buy, which was confirmed by the strong numbers by Honeywell and Caterpillar (CAT). Even though both Honeywell and Caterpillar are up close to 4% pre-market on the results, I believe positions can still be started in these names here and positions added to on any weakness.
What the first quarter results are quickly telling us is the global growth story is still very much intact and it is the safest place to be because it is not an uncertain story like the financials, which still aren’t out of the woods with LiBOR rates still at problematic levels and the European economies starting to look like the U.S. a year ago.
From the Eaton (ETN), CSX (CSX), GE, Johnson controls (JCI), and United Technologies (UTX) 1st quarter results that I’ve looked into so far, here the trends that look good to lead the market higher (and yes, all of them are industrials).
Eaton cited the strongest foreign machinery sales were ag dominated, meaning Deere (DE) should report fantastic numbers and keep plowing forward (pun intended!).
Mining was also strong for both Eaton and Caterpillar.
Oil and gas infrastructure still has many years of construction needed, with McDermott (MDR) coming to mind for oil/gas engineering and Flowserve (FLS) for the components.
For power generation, ABB (ABB) looks good for the buildout of power grids and power plants, and Precision Castparts (PCP) should do well as they can’t keep up with demand for turbines for power plants.
Foreign non-residential construction is still hot as shown by United Technologies’ Otis elevator unit as well as the building efficiency units of Johnson Controls and Honeywell.
CSX showed the railroads are running hot due to huge demand for agriculture, fertilizers, and coal exports - which should also translate to positives for dry bulk shippers like Dry Ships (DRYS).
Eaton and Honeywell are showing aerospace is still the place to be, but be selective because I believe United Technologies fumbled a bit on aerospace. Strength in aerospace was accomplished by ETN and HON with the wear-and-tear replacement parts, so I believe Precision Castparts can do well also as engines get worn with more mileage. United Technologies’ Hamilton Sundstrand has more on the line with the Boeing (BA) 787, which will come to market sooner or later, but the delay with the 787 is obviously hurting United Technologies.
Disclosure: I own shares of HON, UNP, ABB, PCP, MDR as of this post