When it comes to the overall direction of the market, some stocks matter a heck of a lot more than others. It's just that they often aren't that visible and they aren't talked about versus, say, an Apple (AAPL) or a Netflix (NFLX) or a Tesla (TSLA).
On a day when the market hangs in once again, it's worth the time to shine a light on the stocks I follow in order to give me a better feel for what's really going on out there -- meaning in the real economy, both domestic and international -- so that you have a sense of where we really are.
Let's start with my mainstays: the rails. I am always trying to measure the actual strength of the economy. One way to do it is to look at the rails because there really are only four publicly traded ones of any size -- Union Pacific (UNP), CSX (CSX), Norfolk Southern (NSC) and Kansas City Southern (KSU) -- and they all carry the same cargoes, so we can get some real comparisons. For example, they move chemicals, lumber, steel, iron, cars, oil, coal and agricultural products -- goods that touch pretty much every end of the real manufacturing economy. Don't forget that they carry trucks through their intermodal divisions, so they do ship merchandise that normally would be thought of as over-the-road cargoes.
Now we often talk about the notion that stocks know things ahead of when they happen. My rule of thumb is that stocks often foresee the future by about three or six months.
In that sense, the rail stocks are like crystal balls. And even though many of these cargoes are down and down big -- especially coal -- even as CSX today told a tale of woe about the need to reset expectations lower, the rails are on fire. These stocks not only have bottomed, but they are leading the market!
I candidly admit that I am completely and utterly baffled by this. Nevertheless, it is my job to try to figure out some order to the chaos, so let me give it a try.
First, there's the simple explanation that perhaps the switch away from coal toward natural gas finally has run its course and that cargo, which is down double digits in a single year, has bottomed.
Coal is a big enough difference maker that it could be the case. But I don't see it happening, and nothing in Washington would make me think otherwise.
I think that it's all about pricing, that the rails are getting favorable pricing for their different cargos -- something that CSX confirmed today -- and that can mean only one thing: business is indeed getting better. Not good enough to bring back the furloughed workers and the sidelined locomotives, but good enough to suggest that the long earnings pressure on this group might be over.
Now that doesn't mean they are all uniform. Union Pacific is the leader today, and it has the most diverse cargoes and is less skewed to coal. I would be more concerned, for example, about Norfolk Southern, which is cutting expenses like mad but still may not be able to outrun the coal demons. But this group action is overlooking anything negative, and that's a hugely positive sign for big infrastructure projects and major home and apartment construction as well as industrial and office building creation. You aren't going to get a better sign than that.
The second stock I follow for the pulse is International Paper (IP). Here's a company that's reinventing itself with technology, allowing for all sorts of creativity in the kinds of paper products it offers. Its novel packaging is giving it some extra Street cred as an enterprise that is less tied to rising or following demand for one of the basics of any economy: corrugated boxes.
Nevertheless, International Paper remains a tremendous barometer of commerce and the stock is up 16% for the year. Yet, because it yields 4%, it may have much further to run.
Linerboard, as they call it in the industry, is one of these commodities that goes up in price when there's more shipping to be done and down in price when there is less. It is a pure and simple commodity, and the stock of International Paper predicts that commodity's pricing. When IP goes up, that's an amazing lead indicator of what's to come. The more International Paper goes up, the better you should feel about the U.S. economy as almost 75% of the company's business is domestic. Let's go this far: Despite the anemic employment report we got last Friday, you can't get this rally in IP's stock and believe we are going into a recession or even an economic slowdown.
Next up, Waste Management (WM). CEO David Steiner, a frequent visitor to "Mad Money," has explained over and over again to us that while we think of the company as a curbside garbage disposal company, that's only part of its business and, frankly, not the part that matters. Waste Management is really a gauge of construction, particularly construction of new homes and renovations and teardowns and all signs of residential commerce.
When you get more housing built, you get more stuff that needs to be carted by WM. Well, the stock is up 16% to an all-time high and it's screaming that business nationwide is just plain better. There's no way you can be as concerned about the economy falling off a cliff with Waste Management flying this high. I am sure CEO Steiner himself has to be impressed with how much construction garbage is now fueling his earnings.
Next up? How lucky is this: HD Supply (HDS), which just happened to report today. Its businesses are very strong and they are harbingers of everything you should care about if our economy is growing: facilities maintenance, construction -- both residential and non-residential -- and waterworks. This company has 500,000 clients and every one of its businesses reported strong performance. You can't beat this company as a gauge.
You might think, what do I care about waterworks? The answer: You should care a great deal because HD Supply is the largest distributor of water, sewer and storm equipment -- exactly what you need if you are going to build big housing projects that put a lot of people to work. This company is also the leading supplier of hardware, tools and materials to medium and large contractors. Every line was better than expected.
Again, this is the pulse, the thermometer for the country, and it is flashing 98.6. I like it a heck of a lot more than the non-farm labor report that everyone, like it or not, trades off of, because these guys really know how to keep numbers.
My final bellwether? W.W. Grainger (GWW). You might have seen one in the city where you live. This is the biggest distributor of everything. I can't name them all, but I am talking about abrasives, adhesives, hospitality furniture, food service, heating, ventilation and air conditioning, hand tools, hydraulics, lab supplies, lighting, lubrication, pneumatics, safety, security, plumbing, painting -- oh well, you get the picture. This $14 billion company has a stock that's up 14% and is putting up terrific numbers, dramatically better than expected. Is there a better pastiche if not mosaic of the U.S. economy? Grainger's stock has led down pretty much every rough patch I can recall. And now it is on the move higher.
Now stocks can fib. They can be less than perfect prognosticators. But taken together, Union Pacific, International Paper, Waste Management, HD Supply and Grainger can't help but tell the truth. These building block characters, these stalwarts of the U.S. economy, are flashing green, and there's no way, with the averages challenging and creating the highs for the year, you can feel that the rally is a work of fiction. You may fight it. You may dislike it. But these stocks are saying, "Sure, be critical, run skeptical, but don't sweat the program. Embrace it."