The rotation's back and it's nuttier than ever. For days now, this market's been in love with high growth and been pasting the big value plays, particularly the large industrials. It's been relentless as the money cascades out of the companies that need stronger economic growth but aren't getting it and into the consistent growers like Clorox (CLX) and Procter & Gamble (PG) as well as the highest growths like Amazon (AMZN) or the biotechs. (Amazon is part of TheStreet's Growth Seeker portfolio.)
Many of the industrials got down to the point where they sported yields far greater than Treasuries and well in excess of the consumer packaged-goods businesses.
Take Eaton (ETN). Here's an industrial that's become a very poor performer for some time. After being as high as $70 this spring on hopes for some sort of transaction that could use its foreign domicile -- its mail drop is in Dublin, Ireland, to benefit from a lower tax rate. But the company has consistently missed projections and drifted down to $51 where it yielded 4.25%. Today we found out why. There's a giant shortfall at work, $240 million in revenues have been vaporized and there's a minimum of a 5-cent miss per share from the estimates as the company has, among many faults, too much oil and gas. I have been disheartened by this spiral, but I didn't think things were this bad, especially after CEO Sandy Cutler came on Mad Money when the company last reported and told a decent story. It fell on deaf ears and now we know why. It didn't have the horses to do the estimates.
In the morning, I talked about it on my Mad Dash with David Faber and just threw up my hands, saying this one just can't get it straight. The stock had dropped a percent in pre-market trading and I figured it's just another down day.
Nope, the stock, after dropping about 50 cents, promptly pirouetted and jumped substantially higher. How could that be? A couple of reasons. First, Eaton has been in a horrendous bear market, part of the endless and roving bear that takes chunks out of tasty morsels one after another in a rolling fashion. But the bear market met its nemesis in that hefty yield it and the stock bounced off the level that you would have expected it to take out if the news were that bad.
What happened here? First, you have a stock with a yield that's accidentally high, something that caused many industrial stocks to stop going down in the Great Recession. The dividend's always been set at a conservative level, so one shouldn't worry about its safety, especially with Eaton's big cash flow. So the stock has apparently hit a bottom.
How about Dover (DOV)? Here's a conglomerate, heavily centered on oil and gas, that's been a total dog, and I mean no animus toward canines. The stock's been hammered relentlessly by that exposure as oil hasn't been able to stabilize in any certain way. The stock, at $83 last November, has been a victim of the endlessly clawing bear, sliding down to $55 when many of these industrials bottomed. It had bounced to $57 when it reported this morning, and it was hideous. We got a big revenue guide-down, from minus 8%-9% to minus 10%-11% and an earnings slashing that was a tremendous letdown for those who sensed a comeback. You couldn't get a worse statement from CEO Robert Livingston, who pointed out that he lowered guidance "to reflect generally weaker global market conditions." Good grief, thanks for nothing. How much was the stock down on those sad comments? Nope, wrong direction, Dover soared almost 5 points or 8%. It had simply gone down too much vs. that negative news.
Just when you thought it couldn't get worse, along comes United Technologies (UTX), the tarnished industrial that's become one of the "tough owns," a fantastic conglomerate that seemed to have lost its way. Some of that makes sense; it's an elevator company, a business that lives and breathes China, which has slowed pretty relentlessly, bad news because that means a decline in the number of skyscrapers that are the essence of what United Tech needs to grow its business. Plus, it doesn't help that Delta Air Lines (DAL) talked about a wide-body aircraft glut, never good for an engine maker, and the federal government doesn't seem inclined to boost the defense budget, another line from UTX's diverse businesses.
This mix produced a shortfall in revenues of $800 million, from $14.6 billion to $13.8 billion for the quarter. The stock had traded down from $124 last February to $85 three weeks ago before enjoying a ho-hum bounce of seven points. The China mix, the revenue slashing, what has it produced? How about a stock that's soared five bucks or a little more than 5%.
All of these were somewhat predictable if you had paid attention to PPG (PPG), another industrial that had been in the grips of the bear, $117 in July down to $83 at the end of September. Unlike these other companies, PPG actually reported an in-line number and it has been a straight shot to $101.
What do these companies have in common? How about a belief that China can't get much worse? That Europe's getting much better? That the Fed's on hold? Whatever, it's working and gift horses are not getting a mouth exploration.
Now, not every machinery-related company fits this mold. Harley Davidson (HOG), a company that has a pretty stellar record for a loved product, got whacked today because of price competition and the need to invest in new bikes. In the meantime, inventories are too high. HOG came in on the day just three bucks below its recent high. Not enough of a bear market. And unlike Dover, Eaton and United Technologies, this company has consumer exposure and that's not something to bank on.
Or there's IBM (IBM). What can I say about IBM? It blew it again, another forecast cut, more erosion of its old businesses, not enough acceleration of its new business, and it gets ripped for eight points even though it's down 36 points from its $176 high for 2015. My conclusion here is a simple one: IBM's just not an industrial, it's a tech, and we shouldn't try to shoehorn it into one, even as it doesn't have the high-growth characteristics that tech investors crave.
Another stock that got hammered today that could be considered a manufacturer? Lockheed Martin (LMT), the big defense play and a favorite of my charitable trust. It delivered a nice earnings beat but it didn't raise for next year, so it received the market's wrath and is getting banged for three bucks. My take? Again, it hadn't been in a bear market to begin with, so it doesn't share the ability to rally on good news. It just doesn't have the characteristics of today's bull.
Of course, as usual, the money's got to come from somewhere to fuel the industrial rally. And it's right from the darlings of the last two days, the biotechs, which are being mauled, and the Tesla (TSLA), Amazon, Google (GOOGL) contingent. The political headwinds remain too much for Valeant (VRX), the pharmaceutical company that's talking about expanding research and development and creating new drugs, not just jacking up the price of old ones, and it's spilling over to everything from Celgene (CELG) to Regeneron (REGN) to Gilead (GILD) and most definitely Allergan (AGN). We just can't seem to put together a decent streak where we are bear-free, even for a single day, and until we get through this election there will be rallies punctuated by bear raids on pretty much a weekly basis. (Google, Lockheed Martin and Allergan are part of TheStreet's Action Alerts PLUS portfolio. Lockheed is also part of the Dividend Stock Advisor portfolio.)
Still, what's clear is that, once again, some stocks just went down too much, we got too negative on a group and it has a resurgence on negative, not positive, news, proof that this market puts a hate and only lets go when the disgusted holders have already sold and those who left can tolerate the pain.