Investors cast wary eye on U.S. industrial stock rebound

By Lewis Krauskopf
NEW YORK, March 10 (Reuters) - Many U.S. industrial
companies' shares that slid last year over concerns of an
economic slowdown have regained their footing in recent weeks,
but some investors and analysts suspect the stocks still may be
standing on uncertain ground.
Shares of about 10 large industrial manufacturers and
distributors, such as Caterpillar Inc (NYSE:CAT) CAT.N , Parker-Hannifin (NYSE:PH)
Corp PH.N and Eaton Corp Plc ETN.N , have climbed between
roughly 5 percent and 15 percent this year, although most have
not recouped significant declines they suffered in 2015.
In an extreme example, shares of mining equipment maker Joy
Global Inc JOY.N have jumped about 25 percent in 2016. That
may seem impressive, but after last year's plunge of more than
70 percent, Thursday's price of about $15.50 is only about a
quarter of the stock's high in 2014.
The industrials group broke ahead of the broader market in
early February. The Standard & Poor's industrial sector index
.SPLRCI is off about 1 percent for 2016, but that is better
than the 3.3 percent decline for the S&P 500 .SPX .
Analysts pointed to various factors that could be supporting
industrial shares: improving U.S. manufacturing indicators,
stabilizing markets for oil and other commodities, and the
weakening of the dollar, whose strength has undermined the
competitiveness of U.S. manufacturers and the value of their
foreign sales.
But it is not clear whether some struggling industries that
are customers of these manufacturers, such as energy and mining,
will strengthen or support growth.
"This was a quick catch-up, and I think you have to be
really cautious as an investor not to assume that this
resurgence is going to continue," said Kim Forrest, senior
equity research analyst at Fort Pitt Capital Group in
Pittsburgh.
Just before earnings season got into full swing in late
January, Robert W. Baird analyst Mig Dobre determined that the
eight diversified manufacturers he covers were trading an
average of 16 percent below their 200-day moving average, while
seven machinery stocks were 27 percent below that mark.
The stocks may no longer be so "oversold," Dobre said, so
any new investors could be "hoping for real recovery and growth.
"It's too early to call for a more meaningful turn," he
added.
Large industrials, including aviation and transportation
stocks, have as a group traded at a discount to the S&P 500
since late 2014, but the gap has shrunk in recent weeks. The
sector is now at 15.2 times forward earnings estimates against
16.1 times for the broader S&P.
Chicago-based North Star Investment Management holds a
disproportionate amount of industrial shares, finding them still
undervalued, said Chief Investment Officer Eric Kuby.
North Star has been adding to some positions recently,
including Graham Corp GHM.N . Shares of the small supplier of
heat transfer equipment to the energy industry have risen some
15 percent this year after falling more than 40 percent in 2015.
"I think this is a pretty good time to buy the industrial
companies," Kuby said.