Lucky break. I touched on this in my Market Recon column this morning. I got lucky. Last week. I mean it makes sense that an index that is price weighted, which is a stupid way to balance an index, would have to move some pieces around in response to Apple's (AAPL) stock split.
Two of my names are moving on out of the index, and two of my names are moving in. Down in influence on the index will go Apple. Into the index will go Amgen (AMGN) , Salesforce (CRM) , and Honeywell (HON) . Gone and goodbye to Exxon Mobil (XOM) , Raytheon (RTX) , and Pfizer (PFE) .
I have openly and publicly touted Raytheon, Pfizer, and Salesforce for the readership. Everyone knows that I sold out of Exxon Mobil and Amgen a while back. Honeywell has been a name on my book, just there as part of a potential economic recovery play that pays a nice dividend. Good, solid company. Not really growing, but excellent management. I have never pounded the table. Last week, on the dip, I tried to add, and made an honest mistake, an error if you will. I bought more shares than I wanted to. Many more shares than I wanted to. Typo. I saw the error right away. Would have been too easy to cover the error at almost no cost. Something told me to let it ride. I don't know why, usually I would not, but this is my money. I wasn't working for someone else. That matters, and I gambled. Even luckier, I did not sell anything against the position, which I also would usually do if an equity stake gets large enough.
True story. I got lucky, and I will take some of this off of the table today, not this Friday, or next Monday morning when the changes to the index go into effect. I'll take my money off of the table today and play the game going forward with house money. Why? Because I know this was a break, not the result of some genius move. Still investing in Honeywell in the first place? That, I believe, was and still is the right thing to do.
The Numbers
Last month, Honeywell reported the firm's second quarter financial performance. On an adjusted basis, the firm posted EPS of $1.26. That number did beat expectations by a couple of cents even if it was earnings "growth" of -40%. Revenues printed -19% from the same period a year earlier, at $7.48 billion. Operating margin collapsed 550 basis points from a year ago to land at 13.6%.
Breaking out sales by business units gets pretty ugly thanks to economic shutdowns created around the pandemic that deeply injured demand for a number of industries that provide clientele to a large industrial conglomerate such as Honeywell. Aerospace was -27%, Building Technologies printed -17%, as did Performance Materials and Technologies. The only sales increases came from the Safety and Productivity Solutions unit thanks to growing demand for Personal Protective Equipment (PPE), as well as the need to automate certain businesses.
The firm did show $500 million in savings that its first phase of expense related actions announced earlier this year produced. The firm believes that this program combined with a next phase can produce $1.4 billion to $1.6 billion in savings for the full year. Why is that important? Simple, because even without showing growth not just now, but for years, the firm remains a cash flow beast and still pays $3.60 to shareholders annually in the form of dividends.
What I see is this. This stock responds well to economic recovery. This stock will do well should there be an increase in demand for oil, should aerospace rebound, and best of all... even with a recovery, I don't see public standards for usage of PPE in the workplace drifting back to normal anytime soon, even if we are fortunate enough to vanquish this virus over time. By the way, due to the impacts of this virus, the firm is unable to provide full financial guidance until the situation "stabilizes."
The Chart
Shares of Honeywell were trading with a $165 handle in Tuesday's pre-opening session. They were even higher last night. I did not take any off then. I will this morning. Take a look at the chart. The 4165 level is the pivot created by an ascending triangle dating back to the steep selloff that created a cup with handle pattern for the majority of large cap stocks. I believe a hold of this level opens the door for a run at the $184 highs of March. That said, I got away with one. I am not rolling the dice again.
Those still looking to get long the name could try a bull call spread, which is difficult to price with the options market closed. I would try looking at purchasing the September 18th 165 calls, and selling the $170's if I could do it for about a buck. Any more than that, and maybe I go out another month.
(AAPL, CRM, and HON are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
