Mr. Whang: I've been covering this space for about nine years. I've been with B. Riley for a year, focusing on small cap stocks. I was an engineering major in college and worked in the industrial sector in the past, either in sales or consulting. For me, it was a natural progression. Before I became an analyst, I was a consultant working with manufacturing companies, and I wanted to delve more deeply into the financials and become more specialized. When I started as an associate, I initially helped cover the large cap stocks, like GE (GE) and Honeywell (HON). The analyst that I worked for was also previously an engineer, and one of my consulting projects was at GE, which helped. I was working at Lehman Brothers for most of my career and I joined B. Riley last year.
TWST: Can you give us an overview of the sector?
Mr. Whang: Almost by definition on these industrial stocks, they typically
manufacture or distribute durable goods that are sold to customers who are
professional users in the industrial or commercial space. So these businesses
are usually dependent on the economy. With the economy so weak, these companies
are facing difficult times; end demand is quite soft. We saw a marked decline in
demand late last year and currently demand is down significantly year-over-year.
However, business has stabilized over the last few months, and that has
certainly been a positive.
From a stock standpoint, they weakened late last year, and then starting in
March, stocks have actually performed very well. Since early March, the stocks
that I cover are up anywhere from about 30% to more than 80%. I think one of the
drivers of that performance is the shift to a more positive sentiment. There was
a period starting late last year and going into the early months of this year
where there was just tremendous uncertainty. It felt like you were on a roller
coaster ride in the dark and you were free falling and not really knowing when
that free fall was going to stop. I think that was how investors felt back then.
It was really the early March period when you started seeing a number of
encouraging data around housing and about the economy. I believe that may have
triggered some of the optimism that set in as we gained better clarity and
comfort around the worst-case scenario of this recession and its earnings
impact, further ruling out concerns about a possible depression outcome. Now
individuals are reflecting over the last few months and trying to label it a
bear market rally or a bull run. I think many market strategies have called for
a correction, that hasn't fully materialized. I know markets have been weak over
the last week or so.
For the industrial companies, the rapid rate and severity of the slowdown in
demand are unprecedented. If you go back to the third quarter of 2008, most
companies saw positive organic growth and then things really started to slow
down during the last couple of months of 2008. Now many of these firms are
seeing volumes down 20%-plus.
Tickers included in this excerpt: CMCO, GENZ, HON, RBC
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