Jim Jubak

Print-friendly version
Send this to a friend
Posted 6/1/2005

Jubak's Picks
Check out Jim's top stocks for the next 12 months


50 Best Stocks Today
See Jim's list of the 50 best stocks in the world for the long term.


Future Fantastic 50 Stocks
See Jim's reader-assisted Future Fantastic 50 portfolio.




Cool Tools
Get market news by e-mail
See if refinancing works
Personal finance bookshelf
Letters from MSN Money readers
Find It!
Article Index
Fast Answers
Tools Index
Site map
MSN Money









Jubak's Journal
Recent articles:
• Catch Pfizer while it's on the mend, 5/31/2005
• The oil sector's real winners , 5/25/2005
• The Fed is all wrong about inflation, 5/24/2005
More...



 Jubak's Journal
5 stocks in growth pockets

advertisement
Pieces of the economy are seeing accelerating growth, and some companies in those sectors still have cheap stocks.

By Jim Jubak

The stock market can't quite put to bed its worries that economic growth might be slowing too much. Revised figures from the Commerce Department showing that the economy grew by 3.5% in the first quarter and not 3.1% as first reported should've settled the issue, but they didn't. And the strong consensus among economists that growth in the second quarter would be the same 3.5% should've definitely settled the issue, but it didn't. All it took was the weaker-than-expected numbers Tuesday out of a regional survey of purchasing managers to revive the fears.

Those fears are exacerbated by the nature of the bull market of 2003 to 2004. Last year, the market was led by cyclical stocks, which do well in the early stages of the economy's growth cycle when sales begin to accelerate from depressed levels. But cyclical stocks start to break down as the economy slows. Investors begin to sell them in anticipation that revenue growth has peaked and is about slow. Who wants to buy Caterpillar (CAT, news, msgs) at $95 if that price marks the peak before the stock begins a multi-year descent to the cycle's low near the $45 level it touched in September 2002?

I've got two pieces of advice for investors with worries like this.

First, rather than fretting about the will it/won't it of a potential economic slowdown, remember that any growth figure, whether it's 3.5% or 3.1%, is an average over the entire economy. There are pockets where growth is much weaker than that -- ask General Motors (GM, news, msgs) or Ford (F, news, msgs) -- and there are pockets where growth is running ahead of the economy and even accelerating. The stocks that do business in those high-growth pockets are still cheap compared to their growth rates.
See the news
that affects your stocks.
Check out our
new News center.


Second, many of those pockets of above-average growth belong to cyclical industries that are just now recovering from decades of under-investment. Here, thanks to that under-investment, even if the economy just chugs along, manufacturers face production bottlenecks that'll keep them ordering new equipment for two to three years longer at a minimum. The cycles in these growth pockets are a lot closer to the beginning than they are to an end.

For my Wednesday appearance on CNBC's "Morning Call" I picked these three "growth-pocket" stocks.

Out of a slump
  • Joy Global (JOYG, news, msgs) is now reaping the benefits of the 25-year slump in the mining equipment sector that forced the company into a Chapter 11 bankruptcy reorganization in 2001. (You might know this company under its pre-bankruptcy name of Harnischfeger Industries.) During that downturn, mining companies shunned new equipment as, first, the industry consolidated, and, second, equipment from shuttered mines was transferred to more productive mines.

    But now with the industry, especially the coal and iron mining sectors, looking to increase output anyway they can, mining companies are buying equipment again. And now, thanks to that same long downturn, they have only three suppliers to buy from.

    Related news and commentary on MSN Money
    Related resources image
    •The oil sector's real winners
    •5 stocks aided by rising prices
    •5 stocks with something special
    •5 stocks for a possible market bottom
    •Why the market will dodge a dollar disaster


    Lehman Brothers estimates that Joy Global's sales in this cycle will peak somewhere around $2.5 billion annually: in the fiscal year that ended in October 2004 sales came to $1.4 billion. Lehman figures that would result in peak earnings per share of $3.75, better than double the $1.71 a share that Wall Street expects the company to earn this fiscal year. Our StockScouter rated the stock a 7 out of a possible 10 on June 1.

    Tapping the oil sector
  • Gardner Denver (GDI, news, msgs), a maker of pumps and compressors, has a hand in two different growth pockets. It sells its pumps and compressors to the oil drilling and service sector for use in drilling new wells and for stimulating oil flow from older wells, an even faster growing business these days. The company also sells pumps, compressors and blowers to transportation companies that use them to load and unload liquid and dry bulk cargoes. (Read: the global trade in such bulk goods as grain and minerals)

    Gardner upped its presence in the transportation sector through its acquisition last year of Syltone, one of the world's largest makers of this kind of equipment. (The company made another acquisition in March, buying Thomas Industries, a maker of precision-engineered pumps and compressors.)

    First-quarter revenues jumped by 55% from a year earlier and operating income climbed 83%. With sales for drilling pumps just starting to get on track, these shares haven't hit their peak and Wall Street, which projects 25% earnings per share growth for 2005 and just 14% for 2006, is calling the earnings top at least a year too early. Our StockScouter rated the stock an 8 on June 1.

    Temporary turbulence
  • Shaw Group (SGR, news, msgs) carries more risk than the previous two stocks simply because its revenues and earnings tend to be unpredictable quarter to quarter. Adding to the risk, two of the company's customers are withholding payments on two projects and the Securities and Exchange Commission is conducting an informal inquiry into the company. The subject and scope of that inquiry remain unknown at this point.

    But with its customers in the power generation and petrochemical sectors just starting to build plants in China and the Middle East to meet soaring demand for refined oil and chemical products, the long-term trend in revenues and earnings will be firmly up whatever the temporary turbulence. As an added kicker, and one that's likely to grow in importance, Shaw Group manufactures, designs and builds waste-to-energy plants using proprietary technologies that should give it an edge in this fast-growing market.

    Wall Street projects that Shaw Group will earn 84 cents a share in the fiscal year that ends in August, compared with a loss of 45 cents a share in fiscal 2004. The Wall Street consensus looks for earnings growth of 34% in fiscal 2006. Our StockScouter rated the stock a 7 on June 1.

    Exclusive picks
    And, as always, I have two exclusive picks for CNBC.com on MSN readers.

  • Titan International (TWI, news, msgs) is where the rubber meets the farmland. The company makes tires for tractors, combines, plows, planters and irrigation equipment. In addition, the company sells tires to forestry equipment makers for use with log skidders and the like, and to the makers of earthmoving equipment such as cranes, graders and levelers.

    Agricultural tires made up about 60% of sales in 2004, and the company's market share in that sector will climb in 2005 when it completes the purchase of Goodyear's (GT, news, msgs) farm tire business. The deal, which hinges on Titan's ability to reach an agreement with Goodyear's workers represented by the United Steelworkers of America, would combine the companies' dealer networks and enable Titan to put two brands, the premium Goodyear and the mid-market Titan, on the market.

    Agricultural equipment sales are still a long way from peaking, and Titan should be able to continue its turnaround well beyond 2006. The company moved into the black in 2004 after three years of losses and the one analyst who follows this small-cap stock estimates 2005 earnings of $1.42 a share, up 130% from last year's 62 cents a share. Our StockScouter rated the stock a 7 on June 1.

  • Wabtec (WAB, news, msgs) is riding the rails, and right now they look greased. The company makes air brakes, draft gears, slack adjusters, brake shoes and pads, and brake cylinders for railroad cars and engines. In March Wabtec increased its earnings guidance for this year by 10% on its forecast of higher-than-expected industry deliveries of 55,000 cars in 2005 instead of the projected 48,000. All of those new cars come with Wabtec equipment (about 46% of Wabtec sales are to manufacturers of new cars), and the company also sells parts and repair services for maintaining older rail cars.

    With U.S. railroads straining to meet demand, it's a good bet that Wabtec's domestic sales will keep on climbing. But the company has also been making solid progress in markets outside the United States, where sales climbed to 34% of total company sales in 2004 from 24% in 2002. Early this year Wabtec acquired Rutgers Rail, a European rail equipment supplier. Analysts project 41% earnings per share growth this year and 32% in 2006. Our StockScouter rated the stock a 4 on June 1.


    Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.

    E-mail Jim Jubak at jjmail@microsoft.com.

    At the time of publication, Jim Jubak didn't own or control shares in any of the equities mentioned in this column. He doesn't own short positions in any stock mentioned in this column.

    •  

    More Resources
    · E-mail us your comments on this article
    · Post on the Market Talk message board
    · Get a daily dose of market news
    · Sign up to receive an alert when we publish Jim's next article
    advertisement

    Sponsored Links

    MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.