I’m often asked how I go about screening for stocks. The answer is, I don’t. I simply follow several very-high-quality stocks. If one dips down to a reasonable price, then I consider adding it to my Crossing Wall Street Buy List.
One very high-quality stock that’s been catching my eye lately is Eaton Corp. (NYSE: ETN) of Cleveland. Like a lot of good companies, Eaton is fairly dull. The company is a “power management” company. I know, SNORE. It has 70,000 employees and a market cap of $13 billion, yet it seems to be totally unknown to most individual investors.
Investors should understand that Eaton is a cyclical stock. This means that its business is strongly correlated to the broader economy. When the economy does well, stocks like Eaton outperform. During recessions, they often fare much worse.
That pretty much describes what happened last year after Eaton sales and profits had climbed for several years. Their year-over-year earnings peak in the third quarter of 2008, then declined for the next four quarters. Importantly, only one quarter saw a net loss (Q1 ’09). Since then earnings have been on the rise, and the last three quarters have seen huge earnings surprises.
On Wednesday, Eaton posted outstanding results. They earned $1.36 a share which was $0.19 more than expectations. Eaton also gave very strong guidance, saying ETN now expects third-quarter income per share of $1.25 to $1.35, with the Wall Street forecast $1.19. For the year, Eaton expects earnings of $4.75 to $4.95 per share, above the recent Wall Street forecast of $4.57.”
As impressive as that is, it’s probably a bit on the low side. I think Eaton can swing $5 a share this year. Maybe more.
The company also raised its quarterly dividend from $0.50 a share to $0.58 a share which translates to a yield of 3%. This is a great company but at the current price, I wouldn’t call it a screaming buy. This is a good one to follow. If you ever see it go into a downtrend, there might be a great opportunity at hand.
As of this writing, Ed Elfenbein did not own a position in Eaton stock. Ed is editor of Crossing Wall Street, a Web site about stocks and the market designed to help individual investors. Check out his free Buy List of stock recommendations.
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