The Industrial Select Sector SPDR ETF (XLI) has underperformed the market year to date, not surprisingly, given that so many of the sector’s components appear squarely in the crosshairs of a trade war.
However there’s more to the group than just tariff worries, argues, Deutsche Bank’s Nicole DeBlase: She resumed coverage on 10 industrial companies, writing that the cycle isn’t as old as many investors think and the capital expenditure recovery still “has legs,” although she does favor late-cycle plays at the moment.
She writes that Emerson has a lot of timely features, including late-cycle exposure, “substantial” balance-sheet flexibility, and the potential for portfolio change. As for Eaton, while it’s her “most anti-consensus call,” she believes the company can benefit from improving late-cycle growth, and the valuation will re-rate over time. She’s bullish on Honeywell, given its “high-quality nature,” along with late-cycle exposure and margin upside in the medium term.
DeBlase also upgraded General Electric (GE) to Hold from Sell, citing recent asset divestitures. She likes that leadership is “taking bold actions to reshape/simplify the portfolio,” and writes that there’s potential arbitrage between the company’s current stock price and her sum-of-the-parts valuation of $16. Moreover, the $25 billion in debt-reduction could be conservative, given the $60 billion in potential cash inflows, and once another dividend cut is implemented, that will be one less negative event hanging over the stock.
That said, she’s not ready to get bullish yet, writing that there are still many problems to address with the company, even following the asset sales.
GE is up 0.5% to $14.06, and XLI is 0.8% higher to $73.11 this morning.
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