With all the fears about the Chinese economy slowing down from
10% to sub 7% growth, it's no wonder that cyclical sectors like
industrials, materials, and energy have been the laggards in the
past year. Indeed, it's almost enough to make an investor ask if
the global boom is winding down as the strongest developing engine
Here's what the broad sectors look like in the past year...
But, the stock market is at nearly four-year highs and many
cyclical stocks have contributed greatly to the push higher because
the global economy is in better shape than most strategists
predicted a couple of quarters ago. So it helps to look at the
"market of stocks" as well to sort out the winners from the losers.
Below is performance comparison for 8 cyclical stocks over the past
6 months, not far from the 52-week lows for the indexes and many of
these names. I am showing an energy concentration to highlight a
broad and deep sector where stock-picking mattered a lot, even with
crude oil surging to $110 a barrel.
Big Winners: CAT, NOV, EOG
National Oilwell Varco
) have in common besides surging about 35% in the past 180 days?
Each has dominated their industry with earnings momentum. CAT is
the dominant maker of heavy construction machinery with strong
sales to China and other developing economies. NOV provides
equipment and services to energy E&Ps and maintains high
margins doing it. And EOG is one of the winners in domestic
production of oil from North American shale deposits.
Under-Performers: FCX, JOY, APC
Metals and mining have been softer sectors as China slows its pace
of infrastructure development. Early in the week, we heard from
giant iron ore miners BHP Billiton and Rio Tinto that they see less
demand for the essential steel-making ingredient this year as their
biggest customer turns focus to other areas of her economic future
and tries to release the hot air from a levitating real estate
Freeport McMoRan Copper & Gold
) have felt the slow down.
) is a quality E&P that is still making the transition away
from heavy natural gas production. Since that efficient,
clean-burning "fuel of the future" is so abundant and so darn
cheap, many producers like APC have seen a decline in profits in
the past few quarters. This has also been a problem for JOY as nat
gas competes with coal and wins at these prices. Thus demand for
machinery to mine coal has seen a decline.
The Biggest Loser: BHI
), continues the theme of
"nat gas blues"
that I wrote about last week. BHI bought another oilfield services
company, BJ Services, last year and has had to spend considerable
time and resources shifting its business away from nat gas rigs to
more "oily" liquids and petroleum equivalents.
On Wednesday, BHI warned that operating profit before tax for the
first quarter is expected to be lower than the fourth quarter of
2011 because of "rapidly changing" market conditions as described
The Market Performer
) into the mix just because they are the biggest and
most-diversifed of energy companies. It should be no surprise that
their fortunes are more balanced in this regard, with neither
gangbuster growth, nor over-exposure to any one sub-industry of oil
and gas companies. And obviously, with a large market-cap weighting
in the S&P 500, it's performance and beta are highly correlated
to the index.
I am very curious to see if the energy sector catches up to the
rest of the market in the next few months on higher oil and gas
prices. I will revisit this topic and these names during the
April-May earnings season. Either way, good stock-picking in strong
sub-industries will remain crucial to investment out-performance.
Kevin Cook is a Senior Stock Strategist with
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