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Tickers in this Article: B, CRH, TATTF, LIMC


Most economists and market watchers agree that the capital goods sector is cyclical, rising when the economy is expanding or outright thriving and contracting along with business cycle downturns. The recent powerful push off the market's bottom has many analysts believing the worst of the latest recession is behind us, and a new cycle is beginning. If you agree, now may be the time to capitalize on the capital goods sector.

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Who are the Gurus Buying?
Barnes Group
(NYSE:B) manufactures aerospace and industrial components from its headquarters in Bristol, Connecticut. Currently, the company boasts an impressive array of fundamentals, putting it squarely on any value investor's roadmap. Consider first Barnes's P/E ratio of 12.51 and its current annual dividend yield of 4.11%. The company is three quarters owned by institutional investors who apparently also see something in its Price to Book and Price to Sales ratios; P/B for Barnes is 1.43 and P/S is 0.68. Investment guru David Dreman added four million shares of Barnes Group to his portfolios in the last year. Barnes beat Wall Street earnings estimates last quarter by two cents, coming in at 22 cents – enough for the stock to jump 17% in the past few weeks. The company has a very impressive longer term track record too, steadily growing its earnings by 5% per year for the last decade. (To learn more about sector trading, see Sector Rotation: The Essentials.)

Irish and Israeli Names
CRH PLC (NYSE:CRH) is an Irish maker of building supplies to contractors and do-it-yourselfers. CRH offers investors a 5.25% return on its shares per annum and trades at a very respectable P/E ratio of just 7.67-times last year's earnings. The company's shares also trade just above book value (1.19-times) and at 0.58-times annual sales. CRH stock is higher by 40% from its 52-week lows hit back in October. T.A.T. Technologies (Nasdaq:TATTF) is a nano-cap, Israeli-based producer of heat transfer equipment, predominantly for the aerospace and defense industries. T.A.T. shares are up nearly 100% since early March, with much of the rise occurring after news of its merger with Limco-Piedmont Inc. (Nasdaq:LIMC) was announced. The stock trades with a P/E of 12.26 and pays investors an annual dividend of 7.69%. More meaningfully, the shares trade for a miniscule P/B of 0.68 and an equally cheap Price to Sales ratio of 0.47 times.

The Bottom Line
The business cycle is generally well-marked by the stock market, which acts as a discounting mechanism for future business activity. If the bottoms on the major market averages are in, it's likely we'll see more upside from the above mentioned trio. (To learn more, see CFA Level 1 - The Business Cycle.)

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