We’re fast approaching 2020, and there’s one expert who says there’s a group of stocks investors should keep their eyes on heading into the new year.
According to Dave Nadig, managing director of ETF.com, industrials like Caterpillar (NYSE: CAT), 3M (NYSE: MMM), United Technologies (NYSE: UTX), and Boeing (NYSE: BA) are the ones to watch this earnings season for clues on how next year could shake out.
“I think you have to think about industrials as being the canary in the coal mine for really all of next year,” Nadig said Monday. “It’s one of the only portions of the S&P 500 where we’re expecting positive earnings this season. The rest of the S&P is really weighted pretty heavily down, so I think you need to be looking at the space.”
But since Monday, all four of these stocks have reported earnings with mixed results.
Caterpillar and Boeing reported on Wednesday, and both disappointed.
Caterpillar’s results were ugly and management said that demand from users of its heavy equipment was lower than anticipated, which sent the stock lower on Wednesday. In its Q3, Caterpillar earned $2.66 per share on revenue of $12.758 billion, compared to the Street’s expectations of earnings per share of $2.88 on revenue of $13.572 billion.
The heavy machinery manufacturer also lowered its full-year forecast to a range of $10.59 to $11.09 per share versus its previous guidance of between $12.06 and $13.06 per share and below analyst expectations of $11.70 per share.
“Our volumes declined as dealers reduced their inventories, and end-user demand, while positive, was lower than our expectations,” said CEO Jim Umpleby in the company’s earnings release.
“In the fourth quarter, we now expect end-user demand to be flat and dealers to make further inventory reductions due to global economic uncertainty,” Umpleby continued, adding that Caterpillar is taking steps to help it respond more quickly to “positive or negative developments in the global economy in 2020.”
As for Boeing, the aerospace giant reported a more than -50% decline in Q3 profit, and a -20% slide in revenue as it continues to struggle in the wake of the two fatal crashes of its 737 Max plan.
Boeing struck a positive tone for when the 737 Max will begin to fly again, saying that it expects “regulatory approval of the 737 MAX return to service [beginning] in the fourth quarter of 2019.” That optimistic outlook buoyed the stock, which was up 1.19% on Thursday, but airlines are growing frustrated as the grounding of the 737 Max drags on, causing carriers to miss out on nearly $1 billion in revenue this year.
And airlines are already expecting “the damages to grow into 2020.”
“We’re not happy about our situation,” said Southwest Airlines (NYSE: LUV) CEO Gary Kelly. “We put our future in the hands of Boeing in the Max and we’re grounded. I want to settle with Boeing to settle our damages.”
American Airlines (NASDAQ: AAL) CEO Doug Parker says he will make sure his airline is compensated for the disruptions in service as both it, Southwest, and United (NASDAQ: UAL) have been forced to cancel thousands of flights due to the grounding and have scrambled to switch to other aircraft to meet passenger demand.
“We’re working to ensure that Boeing shareholders bear the cost of Boeing’s failures, not American Airlines’ shareholders,” Parker said on the airline’s earnings call.
The 737 Max issue is likely to plague Boeing into 2020 as, despite the plane maker’s expectation of regulatory approval before year-end, airlines have repeatedly delayed when they expect the plane to return to service and no U.S. carrier is planning for the 737 Max to return to schedules until at least January.
Then Thursday, 3M reported and, despite stronger-than-expected Q3 earnings, the industrial conglomerate’s shares dropped more than -4% after the company cut its full-year profit forecast.
3M said that it anticipates full year sales to decline between 1% and 1.5% amid a “challenging macroeconomic environment.”
Of the four, United Technologies was the only stock to deliver an earnings beat, reporting Q3 earrings of $2.21 per share, beating Wall Street expectations by $0.18.
“United Technologies delivered another strong quarter with 5 percent organic sales growth, as well as margin expansion across all four businesses,” said CEO Gregory Hayes in UTX’s press release.
All told, with the exception of 3M, each of these stocks bounced this week with Caterpillar up 1.35% this week, Boeing up more than 1% on Thursday, and United Technologies up nearly 4% for the week.
The market’s reaction could be good news for the sector, but John Davi—founder and chief investment officer of Astoria Portfolio Advisors—says that the global macroeconomic environment isn’t encouraging.
Between the contraction in U.S. manufacturing, the IMF cutting its global growth outlook to 2008-crisis lows, and business inventories growing, Davi says industrial stocks like Caterpillar that look relatively inexpensive are “cheap for a reason.”
“Until those indicators stabilize, I’d avoid industrials,” Davi said. “I just think that on a return per unit of risk basis, I prefer other sectors more so than industrials. So, we’re still very defensively positioned at Astoria Portfolio Advisors.”
Currently Astoria’s largest overweight positions include banks, REITs, healthcare, and utilities.
However, Nadig says that industrials could be in a position to become more attractive if the U.S. and China are able to come to agreement on a trade deal.
But for now, investors may want to “look at something a little more thematic like aerospace and defense stocks,” Nadig said, rather than the whole industrials sector. His choice to get in on that subgroup is the SPDR S&P Aerospace & Defense ETF for its equal-weighted portfolio and healthy earnings forecast.