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Is Conglomerate Sector a Spent Force or One to Reckon With?

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Second-quarter results have been quite impressive for majority of the U.S. equity sectors. Of the major stock indexes, the S&P 500 has gained 4.8% since the start of July while the NYSE has rallied 3.2%. Impressive corporate results for the quarter were one of the main driving forces behind the stock markets rallies.

Of the 16 Zacks sectors, Conglomerates was one of the two sectors that recorded a decline in second-quarter earnings, the other being Auto/Tires/Trucks. Considering the figures, Conglomerates’ earnings fell 4.7% on a year-over-year basis versus 5.6% growth registered in the first quarter of 2018. In addition to the bottom-line performance, the sector’s share performance has been quite dismal since the beginning of the year. The fall of 8.1% in sector’s price is way below 6.8% gain recorded by the S&P 500 during the same time period.

Conglomerates’ results were largely affected by margin pressure caused by inflation in raw material cost due to the ongoing trade disputes between the United States and certain foreign nations like Mexico, Canada, China and European Union. The turmoil started when the world’s largest economy imposed 25% and 10% import tariffs on steel and aluminium, respectively, and subsequently included many other items under the tariff bracket.

Uncertainties are likely to linger until relevant measures are taken by the nations involved to improve the trade policies. Investors willing to gain exposure in the U.S. equity market must be cautious in choosing their investment options.

Conglomerates: Investment Worthy

Though uncertainties continue prevailing for the multi-sector stocks, we can say that there is enough sparks left in the sector.

Conglomerates currently occupy the first position in the Zacks sectors list. Also, it is at the top position of our proprietary Heat Map this week.

It’s worth noting here that sector’s rank is the average of Zacks Rank of all the companies within it. Over the last 10 years, using a one-week rebalance, the top half (including the first eight ranked sectors) beat the bottom half by a factor of more than two. (To learn more visit: About Zacks Sector Rank)

Considering the share price performance, this 19-stocks sector has yielded 17.1% return in the past five years. Also, the sector’s cheap valuation compared with the S&P 500 increases its investment appeal.

Earnings for the sector are anticipated to grow 2% in 2018 against 9.3% year-over-year decline recorded last year. Revenues are predicted to increase 4% in 2018 compared with 2% growth in 2017. We believe a lot of factors are currently favoring the sector. Few of them are briefly discussed below:

Strengthening global and domestic economies are favorable for the Conglomerates stocks. Per the International Monetary Fund, the global economy is projected to grow 3.9% in 2018 compared with 3.7% rise witnessed in 2017. The U.S. economy is predicted to grow 2.9% for 2018 compared with 2.3% jump recorded in 2017.

On the domestic front, improving operations in oil and gas industry, rising demand for air travel, technological upgrade in manufacturing processes and demand from the defense and governmental front will be conducive to the sector’s prospects. Moreover, changes in tax policies, improving labor market, strengthening industrial production, government’s development plans and many more will be beneficial.

4 Suitable Investment Picks in the Sector

Using Zacks Stock Screener, we have zeroed in on four lucrative investment options from the Conglomerates sector that stand tall despite the near-term uncertainties.

Federal Signal Corporation (FSS - Free Report) : Shares of this Oak Brook, IL-based company have gained 45.2% over the past year. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 60 days, the Zacks Consensus Estimate for the company’s current-year and next-year earnings has been revised upward by 10% and 4.9% to $1.32 and $1.50, respectively.

Federal Signal Corporation Price and Consensus
 

Federal Signal Corporation Price and Consensus | Federal Signal Corporation Quote

Hitachi Ltd. (HTHIY - Free Report) : Shares of this Tokyo, Japan-based company have gained a mere 0.1% over the past year. The stock currently carries a Zacks Rank #2 (Buy). The stock’s investment appeal is further accentuated by a favorable VGM Score of A.

In the past 60 days, the Zacks Consensus Estimate for the company’s current-year and next-year earnings has been revised upward by 1.7% and 0.3% to $7.85 and $8.61, respectively.

Hitachi Ltd. Price and Consensus
 

Hitachi Ltd. Price and Consensus | Hitachi Ltd. Quote

Carlisle Companies Incorporated (CSL - Free Report) : Shares of this Scottsdale, AZ-based company have gained 35.5% over the past year. The stock currently carries a Zacks Rank #2.

In the past 60 days, the Zacks Consensus Estimate for the company’s current-year and next-year earnings has been revised upward by 4.1% and 2% to $6.10 and $7.12, respectively.

Carlisle Companies Incorporated Price and Consensus
 

Carlisle Companies Incorporated Price and Consensus | Carlisle Companies Incorporated Quote

Crane Co. (CR - Free Report) : Shares of this Stamford, CT-based company have yielded 22.5% over the past year. The stock currently carries a Zacks Rank #2 and has a favorable VGM Score of B.

In the past 60 days, the Zacks Consensus Estimate for the company’s current-year and next-year earnings has been revised upward by 2.3% and 1.3% to $5.76 and $6.44, respectively.

Crane Company Price and Consensus
 

Crane Company Price and Consensus | Crane Company Quote

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