(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Industrial stocks are having a tough 2018. The Industrial Select Sector SPDR ETF (XLI) is drastically trailing the broader market, falling more than 3% this year, and it's still down nearly 9% off its highs. Trade tensions between the U.S., China and other trading partners already have pushed down these stocks, and now they are poised to fall even further in the coming weeks based on a technical and fundamental analysis.
Group in Turmoil
The price of the industrial ETF is currently at $73.40, just above critical technical support and an essential technical uptrend at $72.85. The technical uptrend started following the election of President Donald Trump in 2016 as part of the reflation trade. Now the ETF is at risk of breaking that uptrend, and that could spell very bad news for the ETF and the other stocks within the sector. Should the price fall below support, the ETF could drop by about 5% more to $69.90, bringing its total losses to nearly 13.5% from its January high of around $81.
Caterpillar Faces Biggest Losses
Of the six stocks, Caterpillar may have the most to fall, with the potential to decline nearly 12% from its current price of $142.50. The stock currently sits just above technical support at $140.50. Shares have already tested technical support on two occasions, and a third retest is crucial. Should support hold, it may create a bullish reversal pattern called a triple bottom. But should support fail to hold, the stock could fall to nearly $125.50 from its current price. It would be a massive loss from the peak in early January of nearly 28% from the highs around $173.
Part of the problem facing these companies is slowing growth, with earnings growth rates expected to slow materially in 2019. Honeywell, for example, is expected to see its earnings growth slow from approximately 13% in 2018, to only 8.9% in 2019, while revenue growth is expected to slow from 6.6% to just 2.5%.
Some of the companies are actually a bit pricey, like Emerson, trading at 19.4 times 2019 earnings estimates of $3.64 per share. When adjusting the P/E ratio for the forecast of 13.3% growth in 2019, the PEG ratio is a lofty 1.45.
The tides appear to be turning on what was one of the hottest groups in the stock market in 2017. Even the easing of trade tensions may not be enough to reverse the bearish trend, and rising tensions threaten to accelerate it.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.