6 Industrials Stocks to Buy For the Next Six Months, Says Oppenheimer

Editor's pick: Originally published Jan. 12.


It will likely take several weeks for the S&P 500 to recover from its steep selloff last week; in the meantime, investors should remain cautious, according to investment bank Oppenheimer.

"In recent months, we've characterized the market's environment as a 'cyclical pause,' similar to the choppy sideways trading in 1994 that lasted roughly 10 months from peak-to-trough," Oppenheimer analysts wrote in a note to clients this week. "Using this road map, we expect the S&P to continue to correct over the coming months. Similar to 1994, we also expect strength in large-cap growth stocks to mask weaker performance by smaller-cap indexes, like the Russell 2000."

The biggest factor in determining how the S&P will perform this year is the price of oil, according to Oppenheimer. "We think the price of oil needs to stop going down before the S&P can move higher again, and we're therefore discouraged about the lack of stabilization," the Jan. 10 note read. (West Texas Intermediate crude oil was down 4% to $30.17 at a recent check on Tuesday.)

That said, there are industries where investors can find opportunity. Oppenheimer "strongly recommends exposure" to tech companies within software and services. The analysts also like stocks within the aerospace and defense sector; health care equipment and supplies; hotels, restaurants and leisure; software and services; and tobacco sectors.

On the other hand, Oppenheimer says investors should sell stocks in the auto components, capital markets, chemicals, electronic equipment and instruments and energy industries as well as any positions in emerging markets such as the MSCI Developed Markets, MSCI Emerging Markets and small-cap stocks within the Russell 2000 Index. The investment firm's monthly "50/50 list" is a list of 50 stocks to buy and 50 stocks to sell, based on a technical analysis of S&P 500 stocks.

Oppenheimer's technical discipline is based on "momentum," or stocks with the best risk-adjusted return over the last six to 12 months, it says. Ideas stay on the list until more attractive opportunities are presented or support levels are broken, Ari Wald, Oppenheimer technical analyst told TheStreet. The list's time horizon is generally between three and six months. Oppenheimer prefers stocks above a rising 200-day moving average on both an absolute and relative basis.

Here are Oppenheimer's picks for the Industrials sector. We've paired the list with commentary from Jim Cramer and ratings from TheStreet Ratings, TheStreet's proprietary ratings tool, for another perspective. When you're done be sure to check out Bank of America's stock picks that will make big moves over the next three months.

TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equity market returns, future interest rates, implied industry outlook and forecasted company earnings.

Note: Not all of the stocks on the 50/50 List are covered by Oppenheimer analysts.

 

 

 

 

 

 

1. Lockheed Martin
1. Lockheed Martin

(LMT - Get Report)
Industry: Industrials/Aerospace & Defense
Market Cap: $66.5 billion
12-Month Total Return: 14.7%

"Lockheed Martin is a direct beneficiary from mounting defense budgets and escalating geopolitical tensions, particularly in the Middle East, where management's relationships with some of the region's key leaders - built on deeply embedded trust and an impeccable track record of quality - has allowed it to secure a robust project pipeline and international portfolio," said TheStreet's Jack Mohr, Research Director of Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. "Beyond the secular tailwinds, the company throws off cash in spades - generating market-leading free cash flow yields - and returns that cash to shareholders in the form of both a juicy dividend (3%+ yield) and a massive share repurchase program. Its consistency in driving shareholder value creation and legacy of success makes it a must-own in the post industrial world.

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2. Danaher
2. Danaher

(DHR - Get Report)
Industry: Industrials/Industrial Conglomerates
Market Cap: $60.4 billion
12-Month Total Return: 5%

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate DANAHER CORP as a Buy with a ratings score of A-. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, compelling growth in net income, expanding profit margins, largely solid financial position with reasonable debt levels by most measures and solid stock price performance. We feel its strengths outweigh the fact that the company has had somewhat disappointing return on equity.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • DHR's revenue growth has slightly outpaced the industry average of 3.2%. Since the same quarter one year prior, revenues slightly increased by 6.7%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • The gross profit margin for DANAHER CORP is rather high; currently it is at 53.85%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 27.93% significantly outperformed against the industry average.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Industrial Conglomerates industry. The net income increased by 106.2% when compared to the same quarter one year prior, rising from $680.60 million to $1,403.40 million.
  • The debt-to-equity ratio is somewhat low, currently at 0.65, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Despite the fact that DHR's debt-to-equity ratio is low, the quick ratio, which is currently 0.67, displays a potential problem in covering short-term cash needs.
  • Compared to where it was trading a year ago, DHR's share price has not changed very much due to (a) the relatively weak year-over-year performance of the overall market, (b) the company's stagnant earnings, and (c) other mixed results. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • You can view the full analysis from the report here: DHR

 

3. Delta Air Lines
3. Delta Air Lines

(DAL - Get Report)
Industry: Industrials/Airlines
Market Cap: $37.1 billion
12-Month Total Return: 3.4%

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate DELTA AIR LINES INC as a Buy with a ratings score of A. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its increase in net income, growth in earnings per share, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations and solid stock price performance. We feel its strengths outweigh the fact that the company shows low profit margins.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Airlines industry. The net income increased by 268.3% when compared to the same quarter one year prior, rising from $357.00 million to $1,315.00 million.
  • DELTA AIR LINES INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, DELTA AIR LINES INC reported lower earnings of $0.75 versus $12.29 in the prior year. This year, the market expects an improvement in earnings ($4.63 versus $0.75).
  • The debt-to-equity ratio is somewhat low, currently at 0.85, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Even though the company has a strong debt-to-equity ratio, the quick ratio of 0.35 is very weak and demonstrates a lack of ability to pay short-term obligations.
  • Net operating cash flow has significantly increased by 52.20% to $2,067.00 million when compared to the same quarter last year. Despite an increase in cash flow of 52.20%, DELTA AIR LINES INC is still growing at a significantly lower rate than the industry average of 136.59%.
  • Regardless of the drop in revenue, the company managed to outperform against the industry average of 5.3%. Since the same quarter one year prior, revenues slightly dropped by 0.6%. The declining revenue has not hurt the company's bottom line, with increasing earnings per share.
  • You can view the full analysis from the report here: DAL

4. Northrop Grumman
4. Northrop Grumman

(NOC)
Industry: Industrials/Aerospace & Defense
Market Cap: $34.4 billion
12-Month Total Return: 26.6%

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate NORTHROP GRUMMAN CORP as a Buy with a ratings score of B. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, increase in net income, reasonable valuation levels and notable return on equity. We feel its strengths outweigh the fact that the company shows weak operating cash flow.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • NORTHROP GRUMMAN CORP has improved earnings per share by 21.7% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, NORTHROP GRUMMAN CORP increased its bottom line by earning $9.74 versus $8.34 in the prior year. This year, the market expects an improvement in earnings ($9.85 versus $9.74).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Aerospace & Defense industry average. The net income increased by 9.1% when compared to the same quarter one year prior, going from $473.00 million to $516.00 million.
  • The company's current return on equity greatly increased when compared to its ROE from the same quarter one year prior. This is a signal of significant strength within the corporation. In comparison to other companies in the Aerospace & Defense industry and the overall market on the basis of return on equity, NORTHROP GRUMMAN CORP has underperformed in comparison with the industry average, but has greatly exceeded that of the S&P 500.
  • You can view the full analysis from the report here: NOC

5. Snap-On
5. Snap-On

(SNA - Get Report)
Industry: Industrials/Aerospace & Defense
Market Cap: $9.5 billion
12-Month Total Return: 24.3%

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate SNAP-ON INC as a Buy with a ratings score of A+. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, growth in earnings per share, increase in net income and expanding profit margins. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 21.8%. Since the same quarter one year prior, revenues slightly increased by 2.6%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The current debt-to-equity ratio, 0.40, is low and is below the industry average, implying that there has been successful management of debt levels. To add to this, SNA has a quick ratio of 1.54, which demonstrates the ability of the company to cover short-term liquidity needs.
  • SNAP-ON INC has improved earnings per share by 12.5% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, SNAP-ON INC increased its bottom line by earning $7.15 versus $5.93 in the prior year. This year, the market expects an improvement in earnings ($8.06 versus $7.15).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Machinery industry. The net income increased by 12.6% when compared to the same quarter one year prior, going from $103.70 million to $116.80 million.
  • The gross profit margin for SNAP-ON INC is rather high; currently it is at 55.35%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 13.23% is above that of the industry average.
  • You can view the full analysis from the report here: SNA

6. Cintas
6. Cintas

(CTAS - Get Report)
Industry: Industrials/Aerospace & Defense
Market Cap: $9.3 billion
12-Month Total Return: 13.6%

TheStreet Said: Recently, TheStreet Ratings objectively rated this stock according to its "risk-adjusted" total return prospect over a 12-month investment horizon. Not based on the news in any given day, the rating may differ from Jim Cramer's view or that of this articles's author. TheStreet Ratings has this to say about the recommendation:

We rate CINTAS CORP as a Buy with a ratings score of A. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margins and solid stock price performance. We feel its strengths outweigh the fact that the company shows weak operating cash flow.

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 5.4%. Since the same quarter one year prior, revenues slightly increased by 8.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The debt-to-equity ratio is somewhat low, currently at 0.68, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.08, which illustrates the ability to avoid short-term cash problems.
  • The return on equity has improved slightly when compared to the same quarter one year prior. This can be construed as a modest strength in the organization. Compared to other companies in the Commercial Services & Supplies industry and the overall market, CINTAS CORP's return on equity exceeds that of both the industry average and the S&P 500.
  • 46.64% is the gross profit margin for CINTAS CORP which we consider to be strong. It has increased from the same quarter the previous year. Along with this, the net profit margin of 28.30% significantly outperformed against the industry average.
  • The stock has not only risen over the past year, it has done so at a faster pace than the S&P 500, reflecting the earnings growth and other positive factors similar to those we have cited here. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • You can view the full analysis from the report here: CTAS

 

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