Vertical Research Partners Top Picks
In our second annual Vertical Top Picks Report, we present our best alpha generating ideas across 8 Verticals from our US and European coverage. Each of our Top Picks represents an analyst’s most high conviction bottom-up stock selections within the associated coverage industry. We also provide several trading ideas that stylistically or thematically align with a top down framework as well as pairs for short-term oriented investors. In aggregate, our 17 top picks offer 25% upside potential to their 12 months targets and average market cap of $22 billion. Our Top Picks are a dynamic list with performance measured from the time an analyst adds the stock to the “portfolio” until the exit. Our analysts can add or subtract names from the portfolio when they think an idea has run its course, the thesis has changed or it sees more upside in an alternative. In 2017, our top picks portfolio generated a 26.7% return on an annualized basis (reflecting the launch on January 17) versus the XLI at 20.7%, The XLB at 19.9% and the S&P 500 at 18.4%. In the note, we list the stocks that spent all or part of the 2017 performance year in the portfolio and the associated IRR of the portfolio versus select benchmarks. We also illustrate the performance of each analyst’s picks.
• EE/MI: Entering Bullish 2018 While Seeking 2020 Vision – We expect 2018 to be a strong year for Industrial fundamentals as tax reform provides a catalyst for capital spending. 2017 saw a short cycle recovery coming out of the 2015-2016 industrial recession. Clearly “animal spirits” were unleashed by the 2016 election results and the business friendly (e.g. regulatory roll back) posture struck by the Trump administration. We argued that this recovery was a necessary pre-requisite to bridge to higher CapX. Now with the passage of tax reform featuring lower corporate tax rates, accelerated depreciation and the unlocking of unrepatriated earnings, the Industrial economy should have self-sustaining fuel into 2018 and likely beyond…
• Global A&D: We’re Still Dancing – As the music has not stopped playing as of January 1st 2018, the A&D dance continues. With continued airline traffic strength and improved profitability, we remain positive but selective in aerospace, as we think company specific and relative valuation stories are probably more attractive at this stage of the upcycle…
• Machinery: More Selective Posture – Not that selection isn’t always top of mind, but indiscriminate buying of machinery over the past two years has paid off. Into 2018, we expect a narrowing of outperformance versus the broader market, though with still attractive opportunities. We’re encouraged by early cycle recovery in mining, energy and ag equipment…
• Metals & Mining: Discipline Meets Demand – We believe the combination of higher inflationary expectations, a five-year capital starvation cycle witnessed among metals producers, improving global business confidence, healthy levels of infrastructure-driven investment and general beliefs that anticipate more muted cyclical price recoveries should allow metals prices to trend higher…
• E&C: More Projects, Increased Discipline, Better Stocks – Visible order and backlog growth among important civil infrastructure and global defense markets combined with an expected release of projects as the capital starvation cycle ends and animal spirits emerge among energy / commodity producers should allow global E&C service firms an ability to generate organic growth, increased free cash flow and better returns for shareholders…
• Packaging & Forest Products: Easy Money's Been Made, but Still More Left – We believe the “easy money” has been made in the Packaging & Forest Products space given the moves seen in many names (and the stock market at large) over the past several years – and particularly since the group’s February 2016 lows...
• Chemicals: What's Not to Like (Besides Valuation?) – Within the chemicals sector we continue to prefer value vs. growth, preferably with a catalyst. Notwithstanding the strong performance of most commodity-linked chemical stocks over the past year, our bottom-up work on cash flow and valuation leads us to believe that exposure here remains attractive, whether through pure-plays or more diversified chemical stocks…
• Flow Control: Rising Oil, Tax Reform Shape 2018 Narrative – On the back of rising oil prices and US tax reform, we think the backdrop has markedly improved for our Flow Control group. Business confidence is building…
(Please see full report for details)