Capital Goods Are a Capital Idea

The capital goods sector today lacks strong direction. It shows neither great strength nor considerable weakness.

For example, the U.S. Commerce Department in late December reported that new orders for capital goods excluding aircraft and defense, an indicator of business investment in the months ahead, declined 1.4% in November from October, after a 3.9% drop the previous month. But a number of observers say that businesses will be making decent-sized investments this year, and that would be good for capital goods makers.

I mention this because when things in a sector are not clearly going in any one direction, it could be time for investors to jump in. Stocks in the sector are unlikely to be overpriced, yet the prospects for the sector's companies can be at the point where they will experience a strong uptick when things start heading up.

For this reason, I just ran a screen of assorted capital goods companies to see if the guru strategies I use to pick stocks find any of them worthy of your investment. In fact, several get a high grade from one strategy or another. Take a look at these companies. They are not in exciting industries, but they could turn into exciting stocks if the economy begins to heat up as it did in early 2006, when it grew at over 5%.

Eaton

Eaton (ETN - commentary - Cramer's Take), a manufacturer of hydraulic systems, electrical power control devices and components for automobiles and trucks, is a favorite of the strategy I base on Peter Lynch's writings.

The company comes under the category of "fast grower" because its earnings per share, on the basis of the average of its three-, four- and five-year historical EPS growth rates, is a very high 32.88%. When this growth rate is combined with the stock's P/E ratio of 12.99, the Lynch strategy's famous PEG ratio (growth relative to P/E) comes in at a very favorable 0.40. The lower the PEG the better, and a PEG below 0.5 is quite impressive.

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At the time of publication, Reese was long Fuel Tech and Graco, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best-selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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