Today in the podcast, our thoughts on two sectors that are important to the Cyclical/Value trade. Two big things you need to know. First, Energy still looks interesting on our models despite strong outperformance as summer came to an end. Second, we remain market weight Industrials, but find its been one of the more interesting sectors to discuss in meetings, as we see pluses and minuses for the sector that may not be fully understood.
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Starting with Takeaway #1: Energy Still Looks Interesting On Our Models Despite Its Recent Surge
• The thing that jumps out to us the most on our sector work at the moment is the extent to which the Energy sector has outperformed within both the S&P 500 ….
• And the Russell:
• We’ve been overweight this sector within the S&P 500, and find that despite the late summer move the sector still looks attractive on our valuation models with Large Cap…
• …as well as Small Cap.
• Earnings revisions are also in the early stages of a recovery within both Small Cap Energy….
• ….and Large Cap Energy… and have already made a move back into positive territory in Large Cap Energy.
• Going forward, we are keeping our overweight recommendation on the sector intact, while acknowledging our Energy strategist’s view that oil prices are at risk of consolidation around current levels which is a risk to our call.
Moving on the Takeaway #2: We remain market weight Industrials, but there are a lot of interesting nuances for the sector in our work.
• Ahead of RBC Capital Markets’ Industrials Conference this week, we’ve refreshed our work on the S&P 500 Industrials sector, and are reiterating our market weight call.
• The sector underperformed the S&P 500 a little in July and August, but only a bit and it stands out to us for its resiliency.
• From a strategy perspective, we like the sector’s balance sheet profile…
• ….strong long-term EPS growth expectations which are now tracking ahead of the S&P 500…
• ….and its positive EPS and sales revision trends.
• Flows have also been favorable for Industrials.
• Admittedly, the sector’s extremely expensive valuations are an offsetting factor, but we think the sector may be rerating as it is in focus for one of the equity market’s more appealing growth themes - reshoring and the domestic industrial revitalization in the US.
• A weakening US economy and the decline in the ISM manufacturing gauge have admittedly been a lingering concern regarding Industrials for many investors given that the sector has historically underperformed when ISM is falling.
previous growth/tech bubble (:
• This time the building long-term growth appeal of the sector from reshoring may be influencing the performance of the sector more than near-term economic worries.
• Within Industrials, valuations are attractive for some groups (such as Marine Transportation, Air Freight & Logistics, and Trading Companies & Distributors) but elevated in others (including Aerospace & Defense, Conglomerates, and Electrical Equipment).
• We also see deep divergences within the sector on our earnings and sales revisions work. Revisions trends are strongest (mostly positive for both EPS and revenues) for Building Products, Aerospace & Defense, Conglomerates, Machinery, and Construction & Engineering.
• But the revisions picture is different for other industries such as Air Freight & Logistics, Ground Transportation, and Marine Transportation, as these are seeing more negative than positive revisions on both earnings and sales forecasts.
That’s all for now. Thanks for listening. And we sure to reach out to your RBC representative with any questions.
