Dow Theory's Four-Pack

05/26/2006 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

"Four sectors—energy, financials, industrials, and materials—account for nearly all this year’s increase in the US stock market," notes Richard Moroney. With these areas hit hard in recent trading, the editor of Dow Theory Forecast now sees opportunities within each.

"The energy, financial, industrial, and materials sectors are all sensitive to the outlook for interest rates and global economic growth, have been among the hardest hit in the recent market pullback. So, does the recent weakness in these sectors represent a buying opportunity? For several reasons, we believe the answer for selective investors is yes.

"The Dow Theory remains squarely in the bullish camp. Corrections are a normal, healthy part of all bull markets, and a more substantial decline would not be surprising given the market’s advance over the past six months. Meanwhile, fundamentals are attractive. Historically, investors have done well taking advantage of pullbacks in attractively valued shares of recent market leaders. In addition, quality names are available. The four reviewed below rank among the top 15% of US stocks based on our proprietary Quadrix rating system.

"Freeport-McMoRan Copper & Gold (FCX NYSE) earns an Overall Quadrix score of 100—the highest possible rating. Soaring copper and gold prices have boosted results, with March-quarter operating earnings up 49% on a 35% sales gain. Construction and manufacturing demand for copper is surging, particularly in such fast-growing countries as China and India. Copper inventories are low. At 14 times estimated year ahead earnings of $4.50 per share, the stock trades below its five-year average forward P/E of 19. Freeport- McMoRan is a Focus List Buy.

"Ingersoll-Rand (IR NYSE), which produces climate control, industrial solutions, infrastructure development, and security products worldwide has delivered double-digit revenue growth in three straight quarters. North America generates about 65% of total revenue, but Ingersoll-Rand is working to invest abroad, particularly in China, India, and Eastern Europe. Consensus estimates, helped by 12 upward revisions for 2006 and ten upward revisions for 2007 in the last month, project growth in per-share profits of 13% this year and 10% next year. With an Overall Quadrix score of 97, IR is a Focus List Buy and a Long-Term Buy.

"Morgan Stanley (MS NYSE) is reorganizing units and launching new products to improve growth. It is working to recruit experienced advisers, partly because the industry is moving away from per-trade commissions toward collecting fees based on assets under management. In May, the company announced it was cutting 500 broker trainees while offering lucrative bonuses to lure high-producing advisers from other firms. Consensus estimates project per-share-profit growth of 13% in fiscal 2006 ending November and 7% in fiscal 2007. At 11 times estimated year-ahead earnings, the stock trades below its five year average forward P/E of 13. Morgan Stanley, a Buy and a Long-Term Buy, earns an Overall Quadrix score of 92.

"Nabors Industries (NBR NYSE), the world’s largest land drilling contractor, has benefited as soaring energy prices have triggered a surge in drilling activity. Because of a tight supply of drilling rigs, pricing has jumped sharply. The company has received more than 100 three-year contract commitments on new rigs now under construction. Consensus estimates now project per-share earnings of $3.31 for 2006 and $4.40 for 2007, up from $2.00 in 2005. Without a sharp drop in prices for natural gas, which accounts for the bulk of Nabors’ drilling activity, the company seems capable of exceeding consensus estimates. Nabors, with an Overall Quadrix score of 99, is a Buy and a Long-Term Buy."

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