Today’s markets maintain a level of anxiety that another leg-down is coming, namely the notion that we may revisit our former lows of March. As the more bullish investors continue to invest in financial and IT names, it would seem that the vast majority of market movers are taking profits off of the table in the industrial sector of the economy. But while the money seems to be rotating out of the early-cycle names that seem to have gotten ahead of themselves, many of which are up considerably from the bottom, I reiterate that there remains significant opportunity in cyclical-aerospace.
Why Industrials Lost Their “Mojo”
Over the length of the past stock market rally, industrial names enjoyed tremendous gains from the March lows. As one of the sectors to bounce back the strongest, many names like 3M (up over 40% from its lows) (MMM ), General Electric (popped over 115%!) (GE) and Caterpillar (over 80% increase) (CAT) have been the darlings of the bulls. Some of the largest gains off of the 2-month stand have been made in industrial names… while similar gains were to be had in financials, information technology, energy and materials. If all of these groups have momentum, why has a shadow been cast on industrials?
Financials have valuation on their side. Investors feel that because names in the sector have traded at “$X” in the past, they deserve to rebound strongly and command a better trade in any upward push. Energy and materials are both tied to the commodity markets that, again, many have felt are lying too low… even in the current state of things; aggressive ag./oil & gas traders are going to pull this group higher. Then we have IT, which is the darling of the rally that many think should be leading the pack higher. Finally we come to industrials. With this group, rather than suggest a higher “worth,” most analysts are downgrading names on valuation calls saying that they have “gotten ahead of themselves” (the subject of this thesis).
I wouldn’t disagree, but there are overlooked names in the aerospace market that are escaping public eye and could be leaders in the next leg-up!
Why 2010 could be BIG for Aerospace
One group we are very bullish on here at Bullish Bankers is aerospace. This late-cycle play could pay out in spades if the markets turn. As opposed to the early-cycle names that took advantage of the earlier rally because of their cyclical nature, the major aerospace conglomerates have been left out of the party… and continue to present artificially-low valuations as of today’s close. With the markets getting “no worse,” the theme continues to be improvement in the second derivatives, which suggests margin improvement and an eventual recovery in the group.
