At Zacks -- and many other stock trading shops like ours -- the ebb-and-flow of stock markets is initially seen from its daily, quivering share price-trading surface.
Below it, there is a deeper earnings estimate revision battle. This is shifting the deeper trading currents between “bulls” and “bears.”
What this usually means:
- One side of the market (the buyers) sees the coming earnings glass as half full. They believe current stock price valuations are in line with those improvements. They buy the stock.
- The other side (the sellers or shorters) of the market sees the coming earnings glass as empty. They note valuations are stretched -- beyond the ability of underlying economic fundamental to support them. They get out.
Lately in the global arena, we are faced with a sorry situation. Share price momentum has been uniquely one-sided. All of the earnings news flow keeps supporting the bulls, in a novel era of “synchronized global growth.”
It started off great. Then, of late, it has gotten out of control.
How did we get here? Let’s look back at a European economist’s dialogue held in November 2017.
At that time, Deutsche Bank chief international economist Torsten Slok made the case: Global economic health “has never been more robust.” He cited the fact that the number of countries in recession had dropped to its lowest level in decades, ValueWalk reported.
“We have never seen a smaller number of countries in recession as we do at the moment. And if you look ahead to the next few years… we are going to see that fall even lower.”
Inside its November 2017 quarterly economic outlook, Organization for Economic Cooperation and Development (OECD) data was what backed up his claim.
According to this Paris-based group, real GDP growth is indeed synchronized globally now. That meant this: No major economy is in contraction mode for the first time since 2007. World GDP will advance +3.6% in 2017 — its best year since 2011 — and they expect +3.7% growth in 2018.
This key OECD world growth mark in 2016? Just +3.1%.
Synchronized growth boosts exports and global trade. This happens because more countries have the capital and internal demand to make purchases on the world markets.
With that knowledge in hand, let’s turn our attention to a specific “global” industry and its share price story. It can update us on where this whole “synchronized global growth” story is currently.
I am referring to Manufacturing – Construction and Mining. These are the guys who make the big earth-moving equipment, to sell or rent.
After a big profit-taking dump, the YTD 2018 return of the 9-company strong Manufacturing – Construction and Mining industry is +4.14%. For reference, the S&P 500 is up around +5.6%.
For a stretched valuation reference point, consider this. The Manufacturing – Construction and Mining industry forward 12-month P/E ratio is 22.6 now. The S&P 500 is 18.5.
Underneath stretched valuations, a fully positive top-down earnings estimate story shows why this industry’s share price momentum stays ON!
The Zacks Industry Rank is high at #25 in the first week of February 2018. It was even higher the week prior, at #16 out of 265. There were 3 positive company earnings estimate revisions to add to the picture, and just 1 negative revision.
Studies have shown us: Roughly half a stock's price movement can be attributed to the group it's in. In fact, the top 50% of Zacks Ranked Industries outperforms the bottom 50% by more than 2 to 1.
That is what “synchronized global growth” can do for you. Create no downside catalysts for stock groups like this.
The problem with this should be obvious to you now -- the bulls are getting all the confirmation -- and the bears, nothing. That leads to a very unstable, momentum trading share price.
Here are 2 individual stock stories to further elaborate on this one-sided theme…
Caterpillar (CAT - Free Report) ): This is a Zacks #1 Rank (STRONG BUY) stock. The long-term VGM score is C. The Price to Earnings Growth ratio (PEG) is 1.74. The forward 12-month Price to Earnings (P/E) ratio is 18.0. There is a 1.9% dividend.
The current year Earnings per Share (EPS) estimate is $9.09, and the last EPS surprise was +22%. Expected EPS growth for the next 3 to 5 years is +10.3%.
The share price narrative tracks the global growth story. At the start of 2015, it was a $90 stock. At the start of 2016 (when the global growth low was put in) it was a $70 stock. At the start of 2017, this was back to a $95 stock. At the end of January 2018, it is at a $162 share price, after touching a shockingly high mark of $170.
Caterpillar Inc. is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives.
Caterpillar provides the solutions you need to build a successful construction contracting business.
Cat Connect makes smart use of technology and services to improve your operational efficiency. Working with your Cat dealer, you can find the right combination of Cat Connect technologies and services for your sites.
Cat Financial provides retail and wholesale financing solutions to Cat customers and dealers for the complete line of Cat machinery and engines, Solar gas turbines, other related equipment and marine vessels. As a captive finance company, no other financial institution knows Cat customers and dealers better than Cat Financial. They offer quality service throughout the life cycle of equipment including purchase, protect, manage and resell.
H&E Equipment Services (HEES - Free Report) ): This is a Zacks Rank #1 (STRONG BUY) stock. The long-term Zacks VGM score is A, with a B for Value and an A for Growth. The market cap is a small $1.36 billion. The Price to Earnings Growth (PEG) ratio is 1.30. The forward 12-month Price to Earnings (P/E) is 24. There is a 2.7% dividend.
The current year EPS is $1.67 and the last EPS surprise was +95%. Expected EPS growth for the next 3 to 5 years is +18.5% annually.
Just exactly as CAT did, the HEES share price narrative tracks the global growth story. At the start of 2015, it was a $25 stock. At the start of 2016 (when the global growth low was put in) it was a $15 stock. At the start of 2017, this was back to a $23 stock. At the end of January 2018, it is at a $40 share price.
Note: this stock’s beta is very high at 2.90.
H&E Equipment Services, Inc. is one of the largest integrated equipment services companies in the United States with full-service facilities throughout the Intermountain, Southwest, Gulf Coast & Southeast regions of the United States.
The company is focused on heavy construction & industrial equipment and rents, sells & provides parts & service support for four core categories of specialized equipment. They are hi-lift or aerial platform equipment, cranes, earthmoving equipment & industrial lift trucks.
By providing equipment rental, sales, & on-site parts, repair & maintenance functions under one roof, the company is a one-stop provider for its customers' varied equipment needs.
This full-service approach provides the company with multiple points of customer contact, enabling it to maintain a high quality rental fleet, as well as an effective distribution channel for fleet disposal & provides cross-selling opportunities among its new & used equipment sales, rental, parts sales & service operations.
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