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Conglomerates Down 10.8% YTD, 4 Stocks That Beat the Odds


First-quarter 2018 earnings growth is expected to be in double-digits on a year-over-year basis for 11 of the 16 Zacks sectors. In all the sectors, the Conglomerates space is among the handful whose earnings are expected to contract year over year in the to-be-reported quarter.

Ongoing tariff issues, which will likely impact major U.S. industrials, have clearly weighed on investors’ minds in recent times. On an average, the Conglomerates space has declined 10.8% year to date.

Let’s discuss some economic factors and events which will have a bearing on these diversified companies in the near future.

The Tariff Proposal

The proposal of tariffs on steel and aluminum, announced by the U.S. administration last month, has already left companies across multiple sectors apprehensive about higher input costs and contracted margins. The move has forced investors to consider increasing raw material prices and inflated manufacturing costs, which might make these industry players less competitive.

If enacted, the tariffs will create uncertainties across the supply chain, which is likely to have further adverse impact on margins.

ISM Manufacturing Reading for March

The ISM index for national factory activity in March came in at 59.3, comparatively lower than 60.8 recorded in February, which had marked the highest level in 14 years.

Although a reading of above 50 suggests that the sector is expanding, tariffs proposed by the U.S. administration on steel and aluminum and against Chinese imported products in fields of aerospace, machinery, information and communication is likely to hurt business confidence domestically as well as internationally. Moreover, higher prices, coupled with trade disputes between the United States and China might hamper demand for U.S.-manufactured products globally and in turn can harm U.S. economic growth.

Despite these formidable headwinds, there were a few companies in the Conglomerates space that defied broader negative trends and enjoyed investor optimism amid economic uncertainties. These companies also boast a strong earnings profile, which indicates operational strength. Investors interested in this sector might consider four such stocks, as discussed below.

Four Solid Picks

Federal Signal Corporation FSS: Federal Signal is a leader in environmental and safety solutions. In fact, it is considered to the most popular global designer, manufacturer and supplier of products and solutions that serve municipal, governmental, industrial and commercial customers.

Shares of this Zacks Rank #1 (Strong Buy) stock have gained 11.5% on a year-to-date basis against the Conglomerates decline of 10.8%. Notably, the company has surpassed estimates in each of the trailing four quarters, with an average positive surprise of 16.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Danaher Corporation DHR: Danaher is a global conglomerate that designs, manufactures and markets diverse lines of industrial and consumer products. The company derives its sales from the design, manufacture and marketing of professional, medical, industrial, commercial and consumer products.

Danaher carries a Zacks Rank #2 (Buy). The company’s shares have gained 7.2% on a year-to-date basis, much better than the average return of the Conglomerates. Moreover, the company has an impressive earnings history having surpassed estimates in all the trailing four quarters, with an average positive surprise of 2.8%.

Raven Industries, Inc. RAVN: Raven is a leader in precision agriculture, high performance specialty films and situational awareness markets. Therefore, the company utilizes its strength in engineering, manufacturing and technological innovation. It manufactures a variety of products for customers in the industrial, construction and aerospace markets. Raven consist of three distinct business units namely Raven Applied Technology, Raven Engineered Films and Raven Aerostar.

Shares of this Zacks Rank #2 stock have increased 2.5% year to date, thus outperforming the sector. Also, the company has a decent earnings surprise history, beating estimates thrice over the trailing four quarters, with an average positive surprise of 20.2%.

Crane Company CR: Crane is a diversified manufacturer of highly engineered industrial products. The company offers products and solutions to customers in the aerospace, electronics, hydrocarbon processing, petrochemical, chemical, power generation, automated merchandising, transportation and other markets.

Crane carries a Zacks Rank #3 (Hold). Shares of the company have returned 4.2% on a year to date basis, in contrast to the overall decline in the Conglomerates space. Also, the company has consistently surpassed earnings in the trailing four quarters, with an average positive surprise of 2.6%.

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