The smart move now is to focus on established companies that will benefit from “reflation,” or a return to global growth after the Covid contraction, suggests Francis Curzio, editor of Curzio Research Advisory.
Eaton Corp. (ETN) is a $50 billion industrial giant that makes electrical equipment and systems used in just about every industry you can name. Its products range from equipment used in the electric grid to residential electrical meters and a ton of parts that go into cars, trucks, and planes.
Eaton rakes in over $20 billion a year selling thousands of different products; there’s a decent chance your home or office has some electrical parts (like a circuit breaker or control system) made by Eaton.
Best of all, Eaton is in the middle of multiple growth trends. As you probably know, data centers are booming thanks to big tech trends like big data and cloud computing. These trends create huge demand for data storage.
Eaton makes just about everything you need to build a new data center, aside from the actual computers. They make the “cages” and racks that hold all the servers.
They make the hardware needed to manage the electricity and computer cables. They even make accessories to help manage airflow — a critical factor when it comes to keeping temperatures down.
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Eaton's products also fit into a related trend — energy efficiency. Just about every company — from big utilities to tech giants —is obsessed with reducing its power usage (and expense). This creates a steady, growing demand for Eaton’s latest, most-efficient electrical products.
Eaton is in great financial shape. It has about $800 million in cash on its balance sheet, which might seem a bit low compared to its $8.7 billion in total debt. However, the company generates almost $3 billion in free cash flow a year — easily enough to cover its obligations.
Although Eaton was hurt by the pandemic, it still turned a profit. And as the economy continues to recover, Eaton should see a huge jump in 2021 earnings. And its leaner cost structure means that earnings could really surge as sales rebound.
This stock deserves to trade at a much higher valuation based on its growth profile. It’s a fantastic risk-reward play on the economic recovery. For now, let’s start with a 1/2 position. That will leave room for us to take advantage of any pullbacks that could happen over the next few months.
