Goldman Sachs Says Sell These Industrial Stocks

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In the world of finance and economics, some experts' advice goes much further than others.  Goldman Sachs ranks up at the top of the list in the world of investment, despite the firm's proclivity for underwriting sub-prime mortgages, and their recommendations get ample attention.  The bank recently released a list of 40 stocks to buy and 40 stocks to sell, with industrial stocks ranking high on their list of out-bound picks.  Indeed, there's just one industrial stock on their to-buy list, Johnson Controls (JCI on the NYSE, trading for $43.85 a share), indicating a severe lack of confidence in the field.  Just because the biggest names in the business say to do one thing, however, doesn't always make it the best advice.  Indeed, there's been plenty of times where stock picks that the biggest names have turned down went on to drastically over-perform, or when their advice has been just plain bad.  Sachs thought in 2014 that gold would drop below $1000 an ounce while oil climbed to $90 a barrel, for instance, indicating that even the best picks can use some big asterisks.

Nobody Wants 'Em

Goldman's input comes after a broader trend to ditch heavy industry businesses.  The Industrial Select Sector SPDR ETF has performed about as well as the Titanic during 2015, dropping by nearly seven percent overall at the same time that the S+P 500 dropped by just over two percent.  There's been no shortage of reasons to blame for the dip in heavy industry performance: the ongoing decline and fall of the Chinese spending empire, the lack of capital spending in energy, the failure of mining businesses in the ongoing bear metals market, and a stronger dollar that minimizes overseas spending potential.  At the worst point in August, the ISS ETF hit double-digit drops, a drop that the market has barely began to recover from.  Can investors see much of a reason for a recovery and even a bull market on the horizon?  Not according to Goldman, who projects companies like WW Grainger Inc (GWW on the NYSE, trading for $207.65 a share) and Emerson Electric (EMR on the NYSE, trading for $45.27 a share) to drop hard, singling out these stocks to underperform relative to the Dow Industrial Average by anywhere from five to ten percent. 

Commodity Contingencies

Unlike many other companies that don't even come close to depending on the commodities market, the price of raw goods has played a major part in Goldman's assessment of heavy industry stocks.  Capital investment and spending in energy has downgraded significantly at a time when oil and gas struggle to provide a profit margin even as energy firms slash operational costs.  Companies like Joy Global, for instance, sells mining equipment almost exclusively; Jacobs Engineering provides consulting to petroleum development firms.  Executive management at Jacobs, in fact, began recommending that the company look into new operations and customers a year ago, suggesting that even the heads of the company can see the dismal writing on the wall.  Emerson Electric has seen four out of their five total business segments report decline in underlying sales through 2015, which is why their stock has fallen by 25% this year.  Higher energy prices and higher metal prices represent the sine qua non of much of the "sell" choices picked by Goldman: without an improvement in the commodities market, there's little reason for investors to keep their shares within any portfolio.

Going Up And Coming Down

Like almost all other products available to buy and sell, industrial equipment goes through cycles influenced mainly by short-term demand (or lack thereof).  While some aspects of industrial equipment always remain relatively lucrative, most notably maintenance and repair, wholesale buying comes and goes.  What's more, most companies have very little time in the buying cycle: customers need a quick solution for mining issues.  This makes projecting sales both difficult and inaccurate: Granger noted that their July sales growth would climb from 0% to 2% during the second week in June.  This makes investment bankers look at manufacturers as litmus tests for their customers, meaning that a poor performance from heavy industry stocks will presage a poor performance in mining stocks.  It's hardly surprising that Goldman recommended selling mining stocks in tandem, given the harsh reality of capital flow.  As such, while conditions could improve for heavy industry (and subsequently for miners and energy firms), anyone interested in buying these stocks does so on a leap of faith rather than hard evidence.

  • The Takeaway: what's been bad for the past year in heavy industry continues to be bad through 2015 and into 2016.  Goldman Sachs' recommendations seem to be a bit late -- they'd have been more helpful around the time of last year's election -- but it bears repeating that there's little optimism to be found in the world of heavy industry.  Investors who hold any of these stocks may be frustrated to sell low, especially if they happened to buy in during peak performance three to four years ago.  Yet buying low is better than watching it tumble further, particularly so when some companies are on the verge of major reconstructing or even outright bankruptcy.
  • Goldman Sachs' advice should come with a few asterisks.  One of them is Boeing, a company that's set to suffer due to a depressed price of aviation fuel that negates demand for more efficient airplanes.  Sachs recommends selling on Boeing despite the amount of good news on the aerospace company's side, including new government contracts as well as the expansion of fleets in developing nations and airport hubs.  Selling on Boeing looks to be a major mistake at the moment.

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