Thursday, April 23, 2009
(Cont'd from above)...

Jim (cont'd):   

Now, sometimes you really have to wonder if the market is not totally and unbelievably crazy and arbitrary, capricious, and a schizophrenic task master that refuses to take its medicine… right now is a very confusing moment for a lot of you… it is a moment where the apparent insanity for whatever drives stocks seems to have reached new heights… all of a sudden inconsistency has gone in style, in a major way on the Wall Street fashion show… while consistent companies are not completely and utterly despised… my time at The Ohio State University got me thinking about two Ohio companies… Parker Hannifin (PH) which makes aerospace parts and industrial components, a metal bender… and Procter & Gamble (PG*)… two stocks that are just a keystroke away from each other… but are never the less worlds apart.

A week ago Parker Hannifin missed the streets estimates… when it reported its latest quarter, and slashed its earning guidance for the year… normally when a company misses its earnings and cuts guidance… you know what is going to happen… you expect it to be whipped… in any sane universe it would become a total pariah… so what happened… people can’t seem to get enough Parker Hannifin… it just keeps going higher, and higher, and higher… Jackie Wilson style… stock up 2 points just today.

Meanwhile, Proctor & Gamble reports next week… and I expect it to print, or report, great looking results… the conference call will sound fabulismo… the headlines will be terrific… and I am not alone in this… everybody pretty much expects Proctor to tell us that things are going smoothly and that business is consistent… but the stock has become a total dog… and I fully expect it to be picked apart next week when it reports no matter how good the quarter is… this stock stays in the bow-wow shadow.

Charts of the two which show the trajectories… look at the trajectory since the economy emerged from its post Lehman Brothers depression… right here… isn’t this amazing… doesn’t that tell it all… this is Parker Hannifin, it is this (up)… Proctor is just doing nothing… on Wall Street companies that are in great shape have been shunned since that bottom in the economy… and those that are doing badly… and I think Parker Hannifin is doing badly… they are embraced… so I have to question myself… DC comic style… have we entered Bizarro world… me like em ugly, me put arms on Venus DiMilo… me put head on winged victory of Sammath race… is the market just nuts… or maybe could it be that there is some method to this madness?...

That it all makes sense when you come at it from the right perspective… you just need a teacher like me, a grizzled veteran who has seen it all before… and is just crazy enough to understand and be able to explain the context… a man who is conceited enough, to understand the conceit… so what is going on that makes us embrace the bad at PH and loath the good at PG… the way I see it, it is not about them… the specifics of either company aren’t what is important… right now I believe that we are witnessing one of the most vicious sector rotations that I have ever seen… much more vicious than those beach volleyball games that we look at, that really is not about volleyball.

Alright, what is a sector rotation… it is when money managers move en masse to dump one group of stocks in favor of another one… the people running the hedge funds and the mutual funds think pretty much all the same… when the economy is going into the tank… they will rotate out of the inconsistent cyclic stocks into the consistent secular growers like Procter & Gamble… but right now we are coming out of the depression… and that is when the big money guys sell the Procter & Gamble and move their money into the PH’s…. companies that can do really, really well if the economy improves… the major institutional investors who basically call the shots when it comes to short term stock prices… do not care at all about last quarter… right now the rotation means… sell, sell, sell… companies that could report a decent year over year in April 2010, decent… and those … buy, buy, buy… those that could report an explosive year over year number… next year Proctor & Gamble will probably post results that look pretty similar to this year… probably a couple of pennies better… enough to make investors say, um not bad.

But Parker Hannifin, they do not see an earnings disappointment… they think that if this is how PH looks now… a number from the heart of a depression… that is still pretty decent courtesy of great management, cost savings from frozen salaries, head count reductions… who knows what kind of percentage gains it could put up next year… or even what is known as linked quarter, more Wall Street jibberish meaning the next quarter that gets reported… PH refused to be defeated by the business cycle… and now the cycle is tilting back into its favor… gross margins should explode if sales pick up, while costs go down… and that is what could happen with Parker Hannifin… the year over year comparisons… what we live for on Wall Street will be humongo.

Now, let’s get all medical… if you want to be a proctologist on the other hand… you will get consistent small earning bumps from Proctor that nobody will care about… big money thinks that PG is a stock you buy when the world is going to end… and only the professors, short sellers, and media people still believe that… what else is Parker Hannifin doing right now… aerospace market pretty resilient… down just 12% last quarter… that is not bad… remember a lot of guys down 25%, 30%… North American Industrial orders were down 35%… Climate Control is down 36%… this is a supplier to both Boeing and Air Bus… it had $10b in aerospace contract wins… and with new plane models expected next year, I think this could be great… nice yield, 2.3%.. it is in the habit of raising its dividend… most importantly this stock was priced for a depression… now the depression has ended… now the street thinks that it has the business cycle on its side… I agree with the street.

How about Proctor & Gamble… even though it is out of favor, it has got a terrific 3.5% dividend yield… it has raised that dividend every year for decades, the best record in the New York Stock Exchange… so if you simply reinvest the rising dividends and let them compound you are going to have a good return… the Wall Street fashion show periodically dumps classic men’s wear like Proctor & Gamble and goes for something flashy like PH… and I think that patient people at home will get a real bargain next week on some long term merchandise… I would not try to make a stand in this right now… this proctologist says that owning Proctor is like having a colonoscopy, you get one at 50, and that is just where the stock is… but as long as you realize that it is going to get pounded because of the rotation than longer termers can buy it as it gets hammered… and save it for a rainy day when fashion change again.

You, unlike the mutual funds and hedge fund managers do not have to report your results or show anyone what you own… you have no clients peering over your shoulder… so you can take the colonoscopy with tons of water and hold on.

The bottom line…

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