Weak Economy but Strong Industrials…How? ADT Corp (ADT) and More

My followers might remember that I extensively covered industrial stocks before the start of the earnings cycle. Most of them have realized their gains. However, I still believe that three of those will still experience a rally and the good news has not been properly factored in these stocks:

General Electric Company (NYSE:GE)

One of the Dogs of the Dow, holding this stock has been considered as riskless as a Treasury bond. Many people hold it to get an annual return of 3.5% (which is in fact, its dividend yield). In a downside macro environment, the 75%+ of GE’s Industrial earnings that are aftermarket-related should hold up well. If the recovery continues, GE has high exposure to growth themes such as US / China gas power generation, and a long-cycle aero engines build-out. Overall, the company’s industrial segments are performing exceptionally well, leading to a rise in margins as well as revenues.

Capital allocation should improve materially given GECC dividend. Time and again, bears have chanted criticism against this stock especially calling GECC as a big drag on the company’s profitability. No doubt GECC has been a source of trouble for the company, but the management continues to highlight the strategic “core,” which includes middle market lending, GECAS and EFS, which has sent bullish signals to the market. The M&A environment may not be conducive to a large exit in the near term. I think the company will look to be opportunistic here, perhaps over the next 12-18 months. The regulatory environment remains stable with no surprises to date under Fed supervision and with the company having fully prepared to be a Systemically Important Financial Institutes (SIFI).

ADT Corp (NYSE:ADT)

A $2 billion buyback ahead (~$1 billion before September 2013), a rich pipeline of accretive M&A possibilities, cheap cost of capital, highly visible mid-to-high single digit organic growth (with limited sensitivity to macro conditions), a motivated management team and undemanding valuation gives me a high conviction in the buy recommendation. The M&A activity, clarity on metrics that drive value in the business model, and execution are key incremental catalysts for 2013.

It is important to note that the company recently announced its earnings release for 4Q. The stock hardly moved despite an earnings beat. Also, I was surprised that an announcement from the company to accelerate its buyback activity hardly moved the stock. This makes me believe that the stock will move in case a catalyst hits the stock.