General Electric Company(GE): Are Industrials The Next Biggest Market Movers?

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September 17, 2013 10:12am NYSE:CHII NYSE:FXR

industry2: The industrial sector has lagged an otherwise hot market, but many strategists are looking to it as the next market mover. Improving confidence and an expectation of improving economic growth through the end of this year could


make this sector the next big winner.

Industrials have been lackluster to say the least, held back by slowing in the emerging markets and a recession in the EU, but analysts are looking for 11% earnings growth in that sector next year. With improving economic projections for 2014, this slow poke of the market looks to be the best place for the second half of 2013 and 2014.

Despite improving economic numbers this year, industrials have only run up a fraction of other sectors like small companies, consumer discretionary and financials.

Barron’s recently ran a screen of 61 industrial stocks from the S&P 500 looking for companies that have not followed the broad market up and those that would get a boost by improving economic conditions. The names that jumped out were Caterpillar Inc.(NYSE:CAT),Textron Inc.(NYSE:TXT) and General Electric Company(NYSE:GE).

Analysts have put a target of $110 on CAT, based on earnings estimates improving from $7.25 per share to $8.17 in 2014.

Textron has been held back by weak sales from its private jet division, Cessna, but that is expected to turn around next year. Analysts are looking for as much as a 50% increase in earnings, driven by the aging of the existing jet fleet, which means the number of used aircraft is decreasing and the demand for new ones has to increase.

Look for Textron to move to the $45 area from its present $28.

GE is trading only at a forward P/E of 12.7 and is shrinking its financial arm, which should earn a higher multiple from the market. As its industrial margins improve we could see this one move from its current $23 to about $30.

In fact, conditions are right for all three of these to move up as much as 30% in 2014.

They have been the laggards to date, but keep your eye on the industrials.

Lenovo Is Moving Up

In only eight years, Lenovo has gone from a small PC maker to the No. 1 PC maker in the world. And now it is after the smartphone business.

It is already the No. 2 smartphone manufacturer in China, ahead of Apple and right behind Samsung. It currently has only 7% of the world market for smartphones and tablets, but that’s twice the market share HP has. And it is expected to launch its first U.S. smartphone in 2014.

But Lenovo’s real strength is in the emerging markets: 42% of its sales and profits come from China. So, this one is also a long-term play on China’s growth.

Lenovo expects to sell 50 million smartphones and 11 million tablets this year, all made in its own facility. It produced 11.4 million phones in the first quarter of this year, triple the number from the same period last year. Its full year sales for smartphones in 2013 are expected to be in the 50 million range, with 10 million tablets.

Its current manufacturing facility is capable of producing as many 100 million phones a year.

Despite a shrinking worldwide market for PC’s, Lenovo is expected to see 19% earnings growth or, a $1.40 per share on its U.S. ADR, as its sales shift to their higher-margin products.

2015 earnings growth is also expected to be in the 19% area. And analysts put the stock in the $25 range from its current price of $20.

The company isn’t the top dog in the phone and tablet business – not yet anyway. But based on its growth in just eight short years, and its improving position in China, this is one to definitely have on your bogey board.

by Steve McDonald, Bond Strategist, The Oxford Club

Investment U provides cutting-edge research and strategic financial recommendations for all levels of investors through its morning publication Investment U Daily and its related publications.

Related: Sector Spdr Trust Sbi(NYSEARCA:XLI), First Trust Ind/Prod AlphaDEX Fd (ETF)(NYSEARCA:FXR), Global X China Industrials ETF(NYSEARCA:CHII)


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