It’s the Clint Eastwood Rally

02/06/2012 11:59 am EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Durables makers have led this market higher, and could make more hay still if recent trends hold up, writes senior editor Igor Greenwald.

Clint Eastwood isn’t the only one who thinks the world “is going to hear the roar of our engines” very soon.

Strong spending on durable goods by businesses and consumers has been perhaps the most encouraging economic trend of all, while the turbocharged performance of related shares has added lots of mileage to the market rally.

People don’t make multi-year commitments to a car, crane, or warehouse unless the medium-term future looks reasonably secure…or, equally relevant to our age, it’s time to replace something irredeemably worn out. One or the other of these conditions seems to pertain frequently nowadays, as evidenced by the strong back-to-back gains in durable-goods orders.

Durables manufacturing accounted for 20% of January’s strong gain in payrolls, and the Bureau of Labor Statistics noted that such industries have added 418,000 jobs over the last two years.

More importantly, there’s no sign of a letup in the near term. Consumers are more disposed to buy cars and trucks, furniture, appliances, and even homes than a year ago. Architects increasingly expect a pickup in non-residential construction.

Caterpillar’s 25% surge at the forefront of the Dow’s rally this year has been more than matched by smaller-cap names more geared to a domestic recovery. Heavy-equipment lessor United Rentals (URI) remains the strongest mid-cap stock in technical ratings compiled by

Just five spots below URI is leading RV, bus, and ambulance maker Thor (THO), up 45% since December 14, and jumping 4% to a new eight-month high on Friday after forecasting unexpectedly strong RV sales over the next six months.

The single best-performing small-cap play of late, based on the same formula, has been snowmobile and all-terrain vehicle maker Arctic Cat (ACAT), which is up nearly 50% over the last two weeks, helped by a beat-and-raise earnings report.

And then there’s long-time loser Whirlpool (WHR), which kicked off February with a 14% single-day pop after providing a heated annual outlook at odds with the latest profit miss.

Is it too late to jump aboard this bandwagon? Probably not, given the profit leverage of many such suppliers.

Despite its powerful rally, Arctic Cat still sells for less than ten times trailing cash flow and 14 times next year’s estimated earnings. There’s room for further growth, because while sales grew nicely in 2011, they remained 40% below their 2007 peak. At that peak, Arctic Cat’s cash flow was 70% above last year’s.

The same dynamic can be seen in a name that has recently run as almost as hard as Thor and Arctic Cat, but continues to trade at a 40% discount to last year’s highs. Heavy-equipment maker Terex (TEX) makes cranes and aerial platforms, two categories of construction equipment in increasingly heavy demand. To what degree that is the case could become clearer on February 14, when Terex is scheduled to report quarterly results.

The stock has been upgraded to Buy by a couple of analysts of late. Terex currently sells for 14 times projected 2012 earnings. Yet those earnings would be less than half of Terex’s haul in heady 2006. If construction continues to pick up, Terex could run a lot further.

Also looking promising: agricultural and construction machinery maker CNH (CNH) selling for less than nine times trailing cash flow, and just ten times estimated 2012 earnings, out of concern about weakness in its European markets.

Precision Castparts (PCP), a supplier of advanced composites to Boeing (BA) and the makers of gas engines and turbines, is another stock to keep an eye on. I covered some of Boeing’s other suppliers three weeks ago, and Triumph Group (TGI) as well as Spirit Aerosystems (SPR) have continued to gain altitude.

Eastwood’s Super Bowl ad seems to have evoked a visceral response from a long-depressed TV audience aching to believe in an industrial renaissance. They’ve been buying Chryslers with an enthusiasm not seen in a long time. And Clint may be right about that second half to come.

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