Vertical Research Partners Top Picks

With this note, we update our top picks.  We typically view top picks with a 12 month horizon, implying big changes quarterly are unlikely.  However, if there is no change our analysts must still update and refresh their thesis. The current views are discussed below.  In this note, Jeff Sprague (EE/MI) swaps out JCI in favor of DOV. In A&D, Rob Stallard swaps out General Dynamics for Airbus. Kevin McCarthy adds W.R. Grace to his top pick list after initiating it at a Buy-rating in May. In E&C, Mike Dudas removes Chicago Bridge & Iron, while John Walsh swaps out SPX Flow for Pentair (6/15/2017). Each of our Top Picks represents an analyst’s most high-conviction bottom-up stock selection within the associated coverage industry. We also provide several trading ideas that stylistically or thematically align with a top-down framework as well a trading pairs for short-term oriented investors. In aggregate, our Top Picks offer ~20 percent upside potential to their 12-month price targets and averages ~$24B in market cap.

• EE/MI: Industrials Showing A Stronger Pulse – The prospect of tax reform, regulatory relief and infrastructure spending in a Trump administration could all serve to break the negative feedback loop that Industrials and capital spending have been stuck for years. Instead, “animal spirits” could be sparked creating a positive feedback loop of investment and risk-taking…

• Global A&D: Onwards and Upwards – We had expected uncertainty in 2017, and true to our prediction we’ve been caught out by what we didn’t expect. Rather than geo-political volatility with a new US Administration, it has been a much better than expected performance from the global airlines that we had not anticipated…

• Machinery: Opportunities Remain as Valuation Cools – Our group now trades at a 2.5 turn premium relative to the long-term average, down from a 6x premium to start the year.  In most instances, earnings estimates have revised sharply higher and more than offset the multiple compression..

• E&C: Aggressive Stimulus and Product Demand Dynamics Support Backlog Recovery Expectations – We believe increasingly more confident consumers and business decision makers will allow for underlying support for new order and backlog recoveries during 2017 through at least 2020…

• Metals & Mining: 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…

• Flow Control: Energy in Recovery but Likely Remains Lumpy – Our Energy related Flow Control orders index remained in positive territory for a second consecutive quarter during Q2. Similarly, median sales growth trends suggest the orders will turn positive in H217…

• Containerboard, Wood Products Positioned Better Than REITs, Rigid/Flexibles – We believe the areas more sensitive to any acceleration in economic growth and possible overhauls in the US corporate tax code are likely to perform well as we move through 2017…

• Chemicals: 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 YTD, our bottom-up work on cash flow and valuation leads us to believe that exposure here remains attractive, whether through pure-play or diversified chemical names…

• Agricultural Products: Grain market fundamentals remain challenging with the USDA’s first survey-based yield forecast for the 2017/18 marketing year signaling that we could see a 2+bln bu carry-out for U.S. corn for the second season in a row…

(Please see full report for details)