The long knives are out for the industrials. We are beginning to get forecasts that incorporate tariffs and slowdowns and a cooling of world trade. It's the end of the synchronized global growth story, and it falls at the feet of the White House.
At least that's the story we are hearing. It's the story we got last night from giant German automaker Daimler, the maker of Mercedes Benz. It's what we are afraid we are going to hear from some of the big U.S. companies when they report. It's what we need to worry about in another few weeks when we get earnings.
Or is it?
Right now, we are in a critical re-adjustment period where the stocks of great American industrials are being sold down to levels that represent, to me, actual value.
Take 3M (MMM) . I know it had a very serious guidedown when it reported. I know it has China exposure. I know it has auto exposure -- where the pain point was last quarter. These are all bad.
But what's the stock done? It's gone from $257 to $196. It's chart? One of the worst I have seen in a long time. It counts down, so to speak, to $170, down another twenty-six points from here if it misses again.
But we have seen many high-quality stocks stop going down as they get to 3% yields and 3M will be there very shortly, in about ten points. I say very shortly because at this pace that's a couple of days' time. Maybe it gets to $170 where it will yield 3 and change. It will be down 89 points from its high. It will sell at 15 times earnings.
3M is one of the best companies in the world. It has a fantastic balance sheet, a gigantic buyback, having reduced shares from 703 million to 612 million in six years' time. No one thinks that management is a bunch of bozos.
So what do you do? Do you say, "wait a second the global synchronized growth trade is over, and I am going to bolt because the chart is bad?" Or do you say, the reason this stock has fallen from $259 to $196 is because the global synchronized story is over, dead, spun mutilated and at this point the stock is within 10% of being entirely de-risked and as cheap as it has been since the global recession.
How about United Technologies (UTX) ? With elevators, climate controls and aerospace, it is a natural to sell right here right now with the slowing growth story. Or is it down 16 points from its high with the possibility of a break up into climate, aerospace and Otis to bring out a monster amount of value?
If you think the big story is over, don't you just have to jettison Dow Dupont (DWDP) with its break up into a bunch of different companies including agriculture, specialty materials, plastics and nutrition and biosciences? Heck they have Chinese exposure. They have dreaded European exposure. They are everywhere? Who cares if Ed Breen has created value through thick and thin. This one must go.
Or should it? The stock's at $65 down $12 from its high when the big story was on but just a few months from finalizing the breakup and unlocking value. Can it go to $60? Sure, hey, it could go to $50. Who knows? But to throw it away now because of a stronger dollar, a weakened world picture, general gloom? I think that's not premature. It is post-mature.
I could go on and on. There are so many companies that have global growth that have already seen their stocks crushed. Can they be crushed some more? Of course. Am I early? Probably.
But what happens if we get some compromise on world trade? What if the forecasts prove to be too conservative? What if the stocks, heaven forbid, are beginning to reflect some of the weakness? Don't you have to own some?
Or should you just be chasing. This morning my charitable trust, which you can follow along by joining the actionalertsplus.com club, sold Darden (DRI) , parent company of two of my favorite restaurants, Olive Garden and Capitol Grille. Why? Because we bought the stock in the low $80s and today it traded at $104 up $11. Now I know there are a lot of people buying it up $11. The volume is huge.
But what was I supposed to do? Say I am early? Say that up twenty straight points it's time to hold on for the big gain? Sorry, I couldn't do that. The gain was too palpable, too juicy, for the fickle restaurant business, to hang on after what was already a monster run. Well, you could say, wait a second, the much vaunted 3M could go down $11 easily, heartbeat, and you could get crushed like a bug on a windshield.
I come back, though, and I say, who is saying you have to buy it all at once? Who is saying "this is it, right here right now?" Buy it on the way down. Patiently build a position.
Now, there are plenty of situations where you don't have to think about these tougher global issues. This morning Kroger (KR) showed that it had reinvented itself, changing up the stores, having meal kits that are loved, giving you groceries where and when you want and offering tuition money to its associates. The good stuff is being rolled out over time. I think CEO Rodney McMullen is doing amazing things against Amazon (AMZN) , and succeeding. And no, I don't care about the taxes that are now to be charged against online companies like Amazon because most pay anyway.
And I like tech when you get weakness. This morning we learned that Brian Krzanich is out at Intel (INTC) because of personal issues that I don't want to bother with. What I will bother with, though, is that the stock is too cheap now that the company simultaneously guided up because of strong growth in all segments.
I like the bank stocks ahead of the Fed stress test results that I think will show good things and allow these companies to buy back stock and take advantage of a lighter regulatory environment. They are largely domestic, they are confronted with an unfriendly yield curve. But I think that can change. Let's say the Chinese have to sell treasuries to prop up their stock market, the yield curve inflects meaning the out years see a rise in rates. You can't just look at your screen and say "that's it. Things are over. It's all done. Remember when it was all done when the 10-year yield went to 3.1% and the banks were all the rage? Now it is 2.9% and they are despised. You can't predict a static world.
So, while it is true that I know I am early with my industrial call. I know the big surge into the domestics is not early and is more likely to be late. You want to be in stocks before they turn not after. You don't want to chase, you want to pick your prices and get discounts.
And you have to recognize that the world as you see it, a world where commerce seems to be slowing and industrials are going into second gear has already started to be embedded in the stocks.
You think it was easy to buy Darden, now at $106, at $84 knowing the chart was terrible and the yield protection, while better than the average stock, might not break the fall? You think it was a lay-up to buy after they lowered the boom? No, because the stock was reflecting nothing but positives and you had to let it settle.
Now the industrials are reflecting negatives, not beginning to reflect the negatives, and the banks are reflecting everything bad and nothing good. That's not the time to run. That's the time to start buying.
Not all at once. Not a stake in the ground. But yes, at levels when it looks like it is all over but the shouting, when, like the retailers or restaurants on the way down, it may just be beginning, you just don't see yet, how in heck that can happen.