Six years ago, I experienced my first ever “garden leave” – 3 months of rest/fitness/golf and extra happy “happy hours.” I had an awaiting job and a contract. I smiled for 3 months. This time around no such luck. Setting up a new gig is hard work – I had no idea how hard. And once the infrastructure is set up, then payroll needs to be made for a firm of 17, a dozen sub-contractors, office space in midtown Manhattan and Boston. But I couldn’t be more excited and wouldn’t trade the new challenges for anything. Our teams are motivated and highly skilled, our product is going to break new boundaries, our new data capabilities are potentially game changing, and our service will be unmatched. All we ask for is a chance.
So today we kick-off coverage of the Multi-Industry space with a Positive view. Overall, it’s not a cheap market or sector, but we see plenty of opportunities. We see a solid upcycle in process that is only about 25% played out, but admittedly the stocks appear to be discounting a lot already. We are excited about the prospect for a capital spending resurgence in the U.S. We see the makings of a full blown Emerging Market recovery. We see activism as the new reality in industrials and de-conglomeration as a theme still in play. At the stock level, the only “cheap” stocks have some element of being very broken – either a lack of execution or lack of cash flow, or both. GE is a poster child for that, and there are others like JCI and Rexnord. We see some misunderstood stocks like ITT, ETN, and DOV providing good value. Value names (i.e. laggards) normally play catch-up in upcycles. The biggest call in industrials in 2018 will be whether to press the bets with the winners or rotate to the laggards. Our call favors rotation to value with new money, but we aren’t willing to go 100% yet. Thematic names like Rockwell (ROK), Xylem (XYL), and Fortive (FTV) should still work well into 2018 on very strong earnings momentum and revisions.
In our prior life, we made some timely cycle calls and latched onto some fantastic stories like Honeywell, Danaher, Roper, Xylem, and Rockwell Automation. But we booted the GE call this year, badly, and that’s a big one to screw up. At Melius we are levering data tools more effectively and hope to learn from our mistakes. We have found data that would have warned us on GE’s cash shortfalls. We have found data that should help warn us to the next downcycle. Today we roll out our new Melius Real PMI Index. It’s not a sentiment index, it’s real data, and used in conjunction with our Melius Sentiment Indices – it should have predictive value well above anything we have used before. Only our subscribing clients will see this data.
Last, we are above consensus on 75% of our stocks. 13 of our 28 names have positive ratings. Our highest rated Buy stocks include GE, Emerson, ITT, and Rexnord. Note incrementally more favorable views from our last published work on: EMR, DOV, ETN, WSO, FAST, LII, MSM. Less favorable views include 3M, ST, and MCRN. Our positive views haven’t changed on HON, DHR, ROP, FTV, XYL, HDS, and ROK.