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S&P Capital IQ raises stance on industrials to overweight


S&P Capital IQ’s Equity Strategy Group has raised its recommended stance on Industrials to overweight, from marketweight, citing macroeconomic factors along with strong earnings growth potential. In addition to owning individual stocks within the sector, S&P Capital IQ says some investors might want to look closely at exchange-traded funds (ETFs) with a concentration in these stocks and a modest expense ratio.

Alec Young, Global Equity Strategist with S&P Capital IQ, thinks the sector is poised for outperformance as investors discount a gradual economic recovery in the US, as well as continued solid growth in Asia, believing European woes will remain relatively contained. In addition, despite sporting only a slightly above-average P/E, he notes that the 13% growth projected for 2012 by the Capital IQ consensus is the highest of any sector and well above the S&P 500’s 8.1% estimated gain. S&P Capital IQ recommends a 12% stake in industrials, relative to the S&P 500’s recent 11% weighting.

Jim Corridore, an industrials and logistics equity analyst for S&P Capital IQ, believes heavy industrial machinery, equipment rental, truck and truck engine manufacturing, and package delivery are all likely to benefit from increased global demand in 2012. He thinks profitability in these industries will be enhanced by improved capacity utilization as these companies leverage increased revenues over their fixed cost infrastructures. Corridore has strong buy (5-STARS) recommendations on Cummins (CMI 91 *****), FedEx (FDX 85 *****) and United Rentals (URI 29 *****).

There are 28 different ETFs that S&P Capital IQ classifies as an Industrial ETF, some with broad diversification across different sub-industries and others that are focused on just one such as Aerospace and Defense or Airlines. However, there are six of them that receive an Overweight ranking from S&P Capital IQ for relative performance, risk and cost factors. The ranking methodology employs holdings-level analysis for valuation and risk assessments, including the use of STARS, in addition to evaluating an ETF for other traits such as bid/ask spread, expense ratio, standard deviation and technical analysis. S&P Capital IQ’s Equity Strategy Group’s more favourable view on Industrials has not directly caused a change in the ranking of any ETF, as ETF rankings are derived independently and are updated daily.

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