by Lawrence Meyers | October 2, 2012 1:00 pm
One of the ways to diversify your portfolio beyond asset class is to diversify across economic sector — particularly with equities. There are so many sectors and sub-sectors that it’s easy to get lost, though, so I’ve been choosing sectors that have companies most people are familiar with. In this case, I’m going with industrial goods.
Let’s first nail down what exactly the sector is, because it’s easy to get confused. An industrial goods company produces goods used in construction and manufacturing, such as machinery, materials and other component parts.
These goods break down into two categories. Production goods, for one, are things like raw materials and the aforementioned component parts, and they are involved in the production of a final product. Support goods are anything involved in the actual production process, like equipment, machinery, and tools.
With that in mind, here are two moves in the sector that you should make for 2013.
With the economy wobbling, it’s important to note that the sector is economically sensitive. Specifically, supply and demand in the construction arena is what will drive the sector. If the economy continues to contract, consumers aren’t going to spend as much, and companies in the sector will thus produce fewer goods.
That’s why I think the time has come to sell Boeing (NYSE:BA). I am very concerned about the economy, as more and more indicators suggest we may move into a double-dip recession. Boeing is a brand name, and normally might be considered a safe haven or flight-to-safety stock. Were its stock price lower, I might agree.
But right now, the company is vastly overvalued because everyone is rushing to it. I think investors might be in a for a rude awakening if production slows down. Earnings are already slated to fall 12% this year, but are targeted to increase 20% in 2013.
I’m not so comfortable with those estimates given the slowdown we’re seeing in various sectors. Analysts are looking at 10% growth five years out and I’m wary even of that prognostication. I think the stock is fairly valued in the mid-50’s and at $70, I think there’s too much risk here.
So, I would sell Boeing and instead buy James Hardie Industries SE (NYSE:JHX). The company manufactures and sells fiber cement products for interior and exterior building construction all across the Western Hemisphere. You’ll see its products used in residential construction, manufactured housing and commercial and industrial applications.
You probably have seen the Hardie name in Home Depot (NYSE:HD) or Lowe’s (NYSE:LOW), as it both sells its products directly and through distributors, large home center retailers, lumber yards, builders, real estate developers and hardware stores.
The company is protected from any domestic economic downturn because of its global presence. More importantly, it’s based in Ireland, so an overzealous Environmental Protection Agency can’t kill the business (as it almost did last year to the domestic cement industry).
The company also has no debt, and has seen its free cash flow pop substantially over the past few years, hitting $352 million in FY12. Plus, it just started issuing a dividend and with an eye-popping yield is 8.3%. And yes, it is sustainable.
The bottom line? Dump the airplanes and pour your money into the cement mixer for 2013. You’ll be glad you did.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned securities.
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