Pockets of weakness in industrial are equal to pockets of strength in technology. Slower orders in test and measurement and integrated circuit materials for key industrials led to stocks headed down -- yet those same slow orders saw a rally for the stock of the customers themselves.
Going into this earnings period, we knew about weakness in residential housing and in autos. They've been a continual theme of the economy since Jay Powell announced there were would be one rate hike in December and another three in 2019.
But this quarter, we have heard about a counterintuitive trend: Companies that make equipment for semis, notably DowDuPont (DWDP) , Illinois Tool Works (ITW) and Honeywell (HON) all flagged their tech divisions as sources of weakness. Hitherto, it had been a sign of strength.
At the same time, the customers of their equipment, often the semiconductor equipment companies, were the ones who called the bottom in tech -- beginning with Lam Research (LRCX) . That company's bold $5 billion buyback has done more to lift the stocks of every company -- from Micron Technology (MU) , Advanced Micro (AMD) , Taiwan Semiconductor (TSM) and Intel (INTC) , to KLA Tencor (KLAC) and ASML Holding (ASML) . Those, in turn, have allowed a bottom to be put in for the very semis that go into cellphones, like Skyworks Solutions (SWKS) , Broadcom (AVGO) and Qorvo QRVO.
To some degree, bulls have to wonder, isn't this a dangerous paradox? How can a Lam call a bottom when its suppliers are signaling a soft rest of the year? Is Lam being too bold? The only other semi that said a bottom could be in hand was Western Digital (WDC) -- and even then, I felt the conclusion was forced upon them by analysts anxious to hear something positive.
What happens if the suppliers are right and we are much closer to the beginning of the downturn than the end of it?
Then the semi cohort has moved way too far too fast.
But then the question becomes, will we see those pre-Lam prices again when it is unlikely that we will hear from the semis unless we get something similar to the rare pre-announcement by Nvidia (NVDA) ?
Maybe we should flip things, though, and say that the suppliers are actually wrong. That they are the last to turn. If that's the case, then Honeywell, DowDupont and Illinois Tool Works are too negative.
Now there is so much that... sigh... is negative about DowDuPont, that it can't be a reason to go from hold to buy. Illinois Tool guided to a wider range on the downside for growth, in part because of this business, as autos had already been weak. The rest of the businesses are fine and the stock's intriguing -- except it gave up quarterly guidance that caused enough consternation that it seems like there is another shoe to fall.
Which brings me to Honeywell. Here, there were very few glitches and some huge positives for aerospace and climate controls for commercial construction, as well as terrific numbers from its warehouse automation unit, which is now "hostage" to the suddenly hated Amazon (AMZN) .
The division I found worrisome? None other than the semi materials business line, which had an unexpected downturn.
My thinking: If the entire semi cohort is right, buy Honeywell. But if it isn't, be careful for another leg down in these industrials that are just beginning to see the fall-off in sales, and the semis are all way too bullish, given what the industrials tell us.
