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I'm a firm believer that the market is entering the late phases of a bull cycle here, and this period typically favors the late cyclical sectors: industrial and energy. Usually, the banks and the high-beta growth stocks have a nice run first and then become "dead money" for a while at the end of a bull run. I think the market may be entering this phase. I mentioned this idea twice last week in two of my Buzz & Banter posts, which can be read here
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Looking at the bigger macroeconomic picture, I believe that there will be a slight uptick in inflation toward the end of the year, which will coincide with the Federal Reserve Bank completing its tapering of its QE program and which may coincide with the first post-taper move by the Fed to tighten monetary policy. People at that point likely will blame the Fed for its actions because people are used to receiving money for nothing, but these are things that investors and traders will need to address when the events occur.
For now, I think investors and traders can have a very decent and positive year if they allocate their capital appropriately. I've already been overweight energy stocks in my portfolio for almost six months as I played the fracking trend with Flotek Industries
(NYSE:FTK) and C&J Services
(NYSE:CJES), as well as Phillips 66
(NYSE:PSX), my favorite refiner for an oil play. So, that leaves industrial stocks.
My fundamental screening process to weed out investing candidates is selecting industrial names. This is usually telling for the next six to nine months or so. Below are a few of these names.
(NYSE:CAT): This stock is on an absolute tear right now, but earnings are tomorrow
, so I won't touch it until then.
(NYSE:SNA): Seeing free cash flow rising while seeing capital expenditures rising means the company is deploying capital very efficiently. Additionally, Snap-on is paying down debt consistently as it grows and builds its brands. This one has ripped to new highs, and I would love to buy it on a decent two-day dip.
Deere & Company
(NYSE:DE): The Economic Value Added (EVA) spreads on multinational large caps are exploding as they've refinanced so much long-term debt to ridiculously cheap levels. Deere's cash flow statement is a little confusing as it essentially redeploys capital in the fourth quarter of each year, so the first-quarter cash flow statement is very deceptive. To look at the cash flow statement effectively, look at the trailing three quarters and you'll get a much better picture of its ability to manage both its cash flow statement and its balance sheet. A big chunk of this confusion is caused by its financing arm. By the way, Deere didn't even drop with the rest of the market in the first half of this month.
(NYSE:FLR): This is probably the least attractive of the group as its growth track has been tripped up by management errors. However, this overhang is probably overdone at this point, so Fluor could easily do very well in the near term if it can show that it has improved its business processes.
If I had to buy one, it would be Deere & Company, but Snap-on has the best nine-month prospects if I can buy it on a two-day dip.
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Position in FTK, CJES, PSX.