Are Industrials stalling out?

On Friday Jan 30, 2009 the Industrials index closed at $71.73. The high over the last year was $121.33, which occurred in June and the low was $64.51 in November. Since the low, the Industrials index has risen 9.5%, which is in line with the broader index in Canada and the US. Until the beginning of the year, the Industrial index was pretty bullish with the lows getting higher and the highs getting higher. The channel moving from left to right in an upward direction. However, since the beginning of the year this sector has fallen about 8.5%.

The Industrials sector has a market capitalization of about 260 billion. It represents about 5% of the broader Canadian market S&P/TSX Composite. Some of the companies that are included in the Industrials sector are BFI Canada (BFC), Bombardier Inc. (BBD.B), CAE Inc. (CAE), Canadian National Railway (CNR), Canadian Pacific (CP), Jazz Air Income Fund (JAZ.UN), Ritchie Bros. Auctioneers Inc. (RBA), Russell Metals (RUS), SNC-Lavelin (SNC), Stantec (STN) and Westjet (WJA).

The average dividend yield is 3.45% and the average P/E is 10 for the Industrial index. This suggests that the index is not overvalued relative to the S&P/ TSX Composite. So is this a good time to invest in industrial stocks in Canada? The industrial sector is well represented by infrastructure plays so it should benefit from infrastructure spending in both Canada and the US. They still face some challenges. In Rob Carrick’s Portfolio Strategy column in this weekend’s Globe & Mail, avoiding potholes chasing infrastructure bucks, he argues “some infrastructure stocks have already risen in anticipation of the infrastructure boom, though in Canada some opportunities still remain.” In the US some of the infrastructure stocks have already risen 50%. Furthermore, individual investors are at a disadvantage to large pensions and institutional investors because larger investors can invest directly in projects such as bridges and toll booths as opposed to through the companies. This gives them income and bond like qualities vs. just another diversification play in stocks. Another challenge to Canadian infrastructure companies is if the US decides to become more of a protectionist in its practices. Lastly, these companies are not impervious to the recession and they have possibly risen in anticipation of the proposed stimulus in Canada and the US. It will likely take some time before these companies experience the benefits of rising revenues from contracts for infrastructure improvements.

Since the low in November, we have seen more positive technical signals, however it is in line with the broader market moves and the trend has turned more bearish over the last 2 weeks. Fundamentally, the industrial sector is not over valued, with the exception of a few stocks. Despite the stall in the short term, the longer term industrial sector stocks will benefit from infrastructure spending. Now would be a reasonable time to add these stocks to your portfolio. Invest in industrial stocks that benefit from infrastructure spending in healthcare, transportation, logistics and technology.