Author: Sambit Mohanty
Industrials: Long/Short Ideas in the U.S., Europe, and EM
Key points from this report:
- Industrial production in major economies is improving but remains low y/y.
- Despite weak revenue growth, EPS surprise has been strong so far. Focus List stocks have reported revenue declines in line with estimates. They have surprised on EPS due to better-than-expected margin performance.
- Companies have focused on cost-saving measures to improve cash flow, margins, and EPS.
- XLI has breached its 50-DMA on above average volume after trading in a three-week tight area and has immediate support along its 200-DMA (-6%). Breaching the 200-DMA on above average volume can be a sign of further weakness.
- Building-related sectors have weakened the past four weeks but have outperformed the weak market.
- Small and mid-cap names in Aerospace, commercial services, and heavy construction have gained in the past four weeks.
- The negative alerts matrix helps us identify stocks exhibiting signs of weakness despite strong fundamental ratings.
- An A/D Rating less than -10 indicates an outflow of money. We use the proprietary O’Neil metric to highlight stocks that have a poor A/D Rating, are trading below both the 50- and 200-DMA, and could be under pressure in the event of sustained market weakness.
- Watch list stocks: Morningstar (MORN), Nabtesco (NACO.JP), Valmont (VMI), TetraTek (TTEK), Insperity (NSP), AOSmith (AOS), Regal Beloit (RBC), Daikin (DA@N.JP).
- Actionable FL stocks: Ashtead (AHT.GB), Polycab (POI.IN), Daifuku, Halma.
- Stocks with most negative alerts: ADT, Hitachi Const. (HTCM.JP), China Evergrande (EVRG.HK), General Dynamics (GD), Berkeley Group (BKG.GB), JGC (JGCC.JP).
- Best Short Technical Setups: Acuity Brands (AYI), GD, Colfax (CFX), Umifirst (UNF), Secom (KP@N.JP), LG (LCY.KR), China National Bldg (CNBM.HK).
Consumer & Retail Sector Overview
Topbuild
Key points from this report:
- TopBuild is the top player in residential installation. It installs and distributes building products, specifically insulation in the U.S.
- After breaking out from a stage-one seven-week consolidation base in August, the stock is extended from an ideal buying point.
- It is trading above its key moving averages and at all-time highs. It is now 60% above its 200-DMA, which appears extended in our view.
- We recommend that investors book some profits as the stock is getting extended. It has gained 58% since its addition in the past 19 weeks. The stock is trading 60% away from its 200-DMA, which may be difficult to sustain.
- In BLD’s case, the stock has advanced rapidly in the past two to three weeks. The price spread from the week’s low to high is greater than that of any prior week since the previous base. Therefore, a correction or consolidation could be expected in the near term.
- Strong market position and reach. The company has a market share of >40% in housing starts and access to 99 of the top 100 Metropolitan Statistical Areas. Its broad presence in installation and distribution helps the company to reach a broader set of customers and locations. The presence in distribution compensates for the cyclical nature of installation services.
- Trends favoring BLD: 1) People are spending more time at home and are more inclined to use insulation products for home maintenance; 2) moving out of city centers is also forcing customers to maintain and improve the upkeep of their suburban homes; 3) new housing starts have been strong (BLD has a high market share of new homes).
APAC Weekly Summary
Key points from this week’s report:
Please refer to the attached PDF for the full report.
- The MSCI Asia Index is trading at 52-week highs. Avoid chasing extended names. Continue to increase risk in ideas breaking out from sound bases.
- Nine of 13 markets are in a Confirmed Uptrend. The average number of distribution days is elevated at 4.8.
- The number of stocks trading above the 50- and 200-DMA has remained stable and constructive over the past three weeks.
- The MSCI Asia Large Cap Index is at 52-week highs and continues to outperform both mid- and small-cap indices. However, the small-cap index is now outperforming mid-caps as of mid-July. We are keeping an eye on how this develops given its implications of broader participation in the rally.
- Rotation into Basic Material, Capital Equipment, Consumer Cyclical, and Energy sectors remains an important theme. See our Sector Rotation chart on page 5. Refer to page 3 for price performance trends of leading industry groups in these sectors and page 8 for related ideas near pivot.
- Highlighted Focus List idea: Asian Paints (API.IN). Refer to page 7 for an annotated chart.
- Refer to page 9 for Actionable Focus List ideas.
Economic Summary
Q2 GDP shrank 32.9%:
The U.S. economy shrank 32.9% in Q2, according to the advanced estimate, 120bps better than consensus. It is the
biggest drop in GDP ever, as the COVID-19 pandemic hurt consumer and business spending. The contraction
reflected negative contributions from PCE, private inventory investment, nonresidential fixed investment, residential
fixed investment, and state and local government spending. Fed officials see the U.S. economy shrinking 6.5% in 2020.
Economic Summary
The U.S. economy shrank 5% in Q1, according to the third estimate, in line with the second estimate. It is the biggest
drop in GDP since Q4 2008, as the COVID-19 pandemic forced a partial shutdown of the economy. The contraction
reflected negative contributions from PCE, private inventory investment, nonresidential fixed investment, and exports
that were partly offset by positive contributions from residential fixed investment, federal government spending.
Economic Summary
The U.S. economy shrank 5% in Q1, according to the second estimate. It is the biggest drop in GDP since Q4 2008 as
the Covid-19 pandemic threw millions of people out of work. The contraction reflected negative contributions from
personal consumption expenditures, nonresidential fixed investment, exports, and private inventory investment.
Economic Summary
• Q1 GDP turned negative for the first time after Q1 2014:
The U.S. economy shrank 4.8% in Q1, marking the end to the longest expansionary period in the country’s history,
according to the advance estimate. The contraction reflected negative contributions from personal consumption
expenditures, nonresidential fixed investment, exports, and private inventory investment. It was partly offset by the
positive contribution from residential fixed investment, imports, and federal and state expenditures.
Economic Summary
Q4 GDP in line with estimates:
The U.S. economy expanded 2.1% in Q4, matching the figures from the second estimate and Q3. The positive
contribution from PCE, exports, residential fixed investment, and federal government spending was partly offset by
the negative contribution from the private inventory investment and nonresidential fixed investment.
