Electrical Equipment & Multi-Industry
After a great January, 2018 turned into an awful year as a litany of issues from trade wars, plunging oil, political uncertainty and Fed policy undermined confidence and clouded the economic outlook. With 2019 marking a decade since the last recession bottom, it is reasonable to be concerned this cycle may be over even without the very tangible risks that face the markets and the economy. We currently do not expect a recession to occur in 2019, but growth will be slower. The market at this point has more than discounted a second derivative growth slowdown, so we see the potential for better stock price performance in 2019 as the reality of decent looking earnings growth becomes more apparent. That said, the risk that we could be pushed into a recession sooner rather than later by policy and/or political mistakes is above average. The overhang of when, not if, an eventual downturn happens is likely to persist.
EMR, SWK and HON are our Top Picks for 2019. EMR is a quintessential late cycle name, but with oil under pressure it’s not a lay-up. However, the core of their Automation growth story is in downstream markets such as LNG that appear to have good secular growth. We think the stock offers reasonable downside protection with a strong balance sheet and cash flow and a 3.3% dividend yield along with upside leverage if economic sentiment and oil prices bounce. SWK was the poster child in 2018 for concerns about trade and interest rates. These factors are still a risk, but the temporary trade truce coupled with aggressive restructuring and new product momentum creates potential upside. There is also a consumer angle in the SWK story that could lend support to growth (e.g. Craftsman launch) despite concerns about slower construction activity. HON is as operationally sound as they come and an even better looking company post its recent spin-offs. In addition, it has an underutilized balance sheet, which should allow it to play offense or defense depending on what the macro environment brings.
- Stanley Black & Decker, Inc. (SWK)
- Honeywell International Inc (HON)
- Ametek (AME)
Jeffrey T. Sprague
Andrew M. Shlosh