Europe is the new swing factor
The EU recovery has put heavily exposed US techs and industrials in an enviable position.
Why do people keep talking about how industrial and tech names still seem undervalued even after this remarkable run? I think I have the answer: Europe. Just last week on "Mad Money," I interviewed the CEOs of Avnet (AVT), PPG (PPG) and Eaton (ETN) -- three great American corporations that do a huge amount of business overseas.
All of these companies, like so many terrific U.S.-based enterprises, diversified into Europe many years ago as they recognized that the European Union opened up a gigantic market of 700 million people, all served by one currency. We forget that, before the euro, it was difficult to do business in Europe because of all the different fluctuating currencies and interest rates in each country. The euro truly did unite Europe when it comes to commerce, and it enticed our companies to buy and build there with alacrity.
So we have Avnet, the technology superstore; Eaton, the electrical-equipment concern; and PPG, the proprietary-coatings-and-glass company. These three have represented the cream of the crop in their respective industries, and each company knew it offered superior products and that it could take share from the locals.
Now, if you'll recall, Europe really didn't come down with its version of the economic flu until well after the U.S. economy hit the wall. The illness, moreover, was magnified by two-interest rate hikes that crushed industries in almost every European country except Germany. No company had been prepared for the ultimate depth of the European recession, and the above three firms saw dramatic sales declines in their respective European businesses. That, in turn, hurt overall revenue and earnings, because the continent represented roughly one-quarter of the entire geographic revenue mix.
Now, though, all three of these companies see a noticeable stabilization in Europe that has occurred just this past quarter. Yes, it is true that none of these CEOs -- Avnet's Rick Hamada, Eaton's Sandy Cutler and PPG's Chuck Bunch -- expect anything robust to come from Europe anytime soon. But all expect 2014 to be better than 2013. When you combine easy sales and earnings comparisons with a weaker dollar vs. a resurgent euro -- the currency pair is at $1.38 Monday, a two-year high -- you get the possibility of a pretty huge swing in earnings. Chuck Bunch indicated that even a couple percentage points' swing in European revenue could be huge, because a massive amount of costs had been taken out amid the prolonged downturn.
The techs and the industrials aren't the only companies that have diversified into Europe. U.S. packaged- consumer cyclicals, indusrgoods companies and pharmaceuticals are dominant players there, as well. However, none saw a downturn nearly as huge as that of the cyclicals. Europe could now act as a healthy offset to a U.S. slowdown caused by our dysfunctional government -- something that our purely domestic companies won't have in their arsenal.
Given the breadth of the product Avnet sells in Europe, including semiconductors, software, disk drives and flash memory, you can expect that many of our tech companies are going to see a similar boost. You can say the same about companies as diverse as Honeywell (HON), United Technologies (UTX), Emerson (EMR) and DuPont (DD).
Moreover, we are very likely to see that big advance in sales for which so many have been waiting. I have held that it has been stupid, and is stupid, to wait for it. By the time it happens, these kinds of stocks will have advanced so far that the move will already have been made. That's why I think you need to buy these stocks on any material weakness we get in this country -- a bad U.S. labor report, or a soft gross domestic product figure or retail-sales number. That's because Europe, not the U.S., is now the swing factor. Given the cost takeout and the possibility of very good continental sales, I am sensing that these stocks could be the biggest standouts for 2014.
At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long ETN and HON.
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