Gavekal Capital: Construction & Farm Machinery Stocks Look Dangerous

Wednesday, January 22, 2014

Construction & Farm Machinery Stocks Look Dangerous

When see the majority of companies in any given industry showing similar technical chart patterns we take note. Usually when this occurs there is a bigger force at play which may or may not be obvious at the time. In the case of the Construction & Farm Machinery sub-industry we observe two general chart patterns in our proprietary relative strength point & figure charts: 1) the company has experienced a period of strong relative performance but the trend now shows signs of reverting to a downtrend or 2) the company has been in a tight trading range for several years and is now attempting to break through the bottom of the trading range. This is concerning trend behavior for a group of stocks that are soo sensitive to global, and particularly emerging market, growth. We also note that the average stock in this sub-industry trades at 17.4x cash flow, which is 130% the 10 year average cash flow multiple at a time when EM growth (ex China) seems persistently weak.

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