Blink and you might miss it. That’s what many people are saying about the recovery these days. It’s been 18 months since the Great Recession officially ended, yet the economy seems stuck in the mud. But while many areas still look wobbly, experts see a surge in tech spending and other pockets of strength—along with opportunities for investors to cash in, even beyond the market’s recent rebound.
Companies have been using some of their nearly $2 trillion in built-up cash to replace worn-out equipment and boost productivity with new gear. Corporate spending on equipment and software rose at a 25 percent annual rate in the second quarter, one of the fastest paces since at least 1990, according to the Commerce Department. Sales of transportation equipment soared 75 percent, fueled by a rebound in autos and light trucks purchased by companies. More broadly, manufacturers that survived the recession are now leaner and more competitive globally, says Mark Zandi, chief economist of Moody’s Analytics. “These are the companies that should be on the cusp of good, long-term growth,” he says.
Granted, the economy still faces plenty of problems. Although spending on equipment and software is rising, it’s growing at a slower pace than it was earlier in the year, according to the Federal Reserve. Moreover, until the housing market rebounds—and consumers start buying more big-ticket items—growth could stay muted.
Yet many of these worries may already be priced into the markets, analysts say. The industrial sector has been leading the recovery, for instance, with many companies booking double-digit earnings growth. The good news for investors: The sector looks 20 percent undervalued, based on conservative long-term growth estimates, says Bobby Straus, chief investment officer for Icon Advisers, a quantitative fund shop. Construction-equipment maker Caterpillar, for one, has seen sales of its machinery grow steadily over the past four quarters, and analysts have been raising earnings estimates. The stock trades about 40 percent below its “intrinsic value,” says Straus, who figures the industrial sector overall could lead the market higher.
Some pros see values in other pockets of manufacturing. Companies that supply electronics components to different industries are selling at historic discounts, says Eric Bjorgen, senior analyst with the investment firm Leuthold Group. Yet sales and earnings are rising, which could fuel higher stock prices, analysts say—even if the economy as a whole doesn’t soar. According to Oppenheimer & Co., there have been several periods when earnings for the S&P 500 grew more than 20 percent while the economy trudged along with less than 3 percent growth.
If nothing else, investors seem to have history on their side. Stocks have gained an average of 17 percent in the 12 months following congressional midterm elections, going back to 1934.
Analysts say these stocks should fare well if the sectors they compete in continue their recovery.
DELTA AIR LINES (DAL) Market Value: 10.8 billionYield: N/ABaggage fees may be a drag for travelers, but they’re raking in the dollars for Delta. The airline reaped $1.4 billion from those fees and other ancillary revenue in 2009, according to consultancy IdeaWorks. Revenue is also rising as air travel recovers.
CATERPILLAR (CAT) Market Value: $53.1 billionYield: 2.1 percentSales for this maker of construction equipment have climbed sharply since late 2009, and the company expects to increase earnings 15 to 20 percent annually through 2015. The firm intends to expand into the mining, recently agreeing to buy mining equipment maker Bucyrus for nearly $9 billion, Cat’s biggest ever acquisition.
JABIL CIRCUIT (JBL) Market Value: $3.2 billionYield: 1.9 percentJabil makes everything from electronics components to casings for smartphones. It’s shifting to more profitable, higher growth areas, such as medical devices and aerospace products, says Collins Stewart analyst Louis Miscioscia. Analysts expect profits to jump 67 percent in fiscal 2011, yet the stock trades at just nine times next year’s estimated earnings.
NORFOLK SOUTHERN (NSC) Market Value: $22.1 billionYield: 2.3 percentNorfolk transports goods along its 22,000 miles of rail lines, and railway operating revenue soared 31 percent in the second quarter. That kind of growth may not be sustainable if the economy loses steam, notes Sterne Agee analyst Jeff Kauffman. But the stock trades at a reasonable 13 times estimated earnings.
Data as of 11/22/2010.
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