By: Rob Wertheimer
Machinery stocks rallied hard at the end of 2019, reversing two years of poor performance. Despite that, and despite estimate cuts coming through, the group’s valuation remains at a discount to its normal range versus the multis, and at a wider than normal discount to the S&P more broadly. There is still room for catch up out-performance, in other words. We don’t see that as universal, though. Our price targets have some of the widest divergence that we can recall.
Our top three picks in machinery remain the same: United Rentals, Ashtead, and Caterpillar. Two worked well in 2019: URI and Ashtead were up 58% and 45% respectively, but each has more upside remaining… a lot of the price increase was just a reversal of the previous slide. CAT did not work, but has in our opinion the best execution, best franchise, and best cyclical exposure, all thus far doubted by investors.