Uncertainty and volatility have plagued the markets of late but there's reason enough to believe a short-term up-trend is in store.
For one thing, the speed of recovery has varied from country to country but emerging markets and commodity-producing nations continue to post strong growth. And while the global slowdown has brought about very high fiscal deficits, particularly in Europe, fears that the Eurozone economy is edging towards collapse are beginning to dissipate.
The European debt problem should be addressed at the end of this month, when the European Central Bank (ECB) publicizes the results of its stress tests. I expect the results will bring renewed confidence in the system. It's likely that the largest financial institutions will most probably all be sound, while there will be some smaller institutions that need restructuring. These smaller banks will either quickly recapitalize or be absorbed by larger institutions.
That means we could soon see a strong short-term bullish market trend.
Meanwhile, the International Monetary Fund's (IMF) recent World Economic Report Update showed global growth estimates for the next year and a half that were much stronger than expected.
China will still be growing above 9% in the second half. And the "downside" scenario in Brazil is about 5% gross domestic product (GDP) growth in 2011 – down from about 7% currently. India will accelerate in the second half to almost 9% GDP growth and barely decelerate next year, and Russia will decelerate some from its 4% GDP growth.
Increased global growth means strength for commodities – which in turn leads to higher stock prices in that sector. I especially like the mining sector, which is benefiting strongly from this secular growth trend. In general, the "picks and shovels" play on an industry is likely to deliver much greater returns than the direct commodity play, sometimes with a lot less risk, although this is not the case always.
Many heavy equipment companies have been revealing very robust order flow for the second half. These include Deere & Co. (NYSE: DE), CNH Global NV (NYSE ADR: CNH) and Caterpillar Inc. (NYSE: CAT). The latter sees so much strength in mining that it will be increasing its efforts in the sector.
We are going to play this strong short-term rebound and long-term mining bonanza with Joy Global, Inc. (Nasdaq: JOYG).
Joy Global is highly levered to commodity prices and fears about the end of the cyclical uptrend in commodities will subside in the days and weeks ahead. Global growth will demand an expansion of global mining operations. And the excellent and comprehensive aftermarket support Joy Global offers its customers – which accounts for some 55% of sales – will keep differentiating the firm.
Joy Global Inc. is slightly larger than its close competitor and Milwaukee neighbor Bucyrus International Inc. (Nasdaq: BUCY). And it does not have to digest recent acquisitions. But both names tend to trade together, closely following the developments in the commodities markets.
For example: Bucyrus hit a bump at the end of June, when the Export-Import Bank of the United States (Ex-Im) – a specialty bank that supports the export sector by guaranteeing the risk of the buyer – denied the company financing for a $310 million shipment of coal mining equipment that was destined for a power facility in India.
The bank was following new U.S. policies designed to promote a cleaner environment, and both Bucyrus and Joy Global traded down as a result. However, the Obama administration last week announced a renewed focus on expanding exports. That should be a viable strategy since emerging markets will continue to grow strongly.
In addition, the bar set in the Bucyrus case seems way above the bar set in countries that have much tighter environmental standards than the United States. And there are strong indications that the Eximbank will re-examine the loan and revert to the standard international practice – thus restoring competitiveness to U.S. mining equipment manufacturers.
So, in anticipation of the possible Eximbank announcement, the strong global case for commodities, the reversal of global growth fears as European bank stress tests are revealed, and the strong visibility of heavy machinery orders we are going to buy the stock now.
Financially, Joy Global has been beating earnings estimates consistently, and in the last two quarters in particular. And with operating margins north of 20% and a return on equity approximating 70%, it sports a very high profitability when compared to the industry.
The stock pays a decent and very safe 1.4% dividend yield and at 12-times earnings, it is fairly cheap. Wall Street has not yet caught on to this company, but some analysts are beginning to recognize its potential and are upgrading the stock.
Joy Global is at the bottom end of a well-established trading range, between 45 and 65. It is sitting right at its 200-day exponential moving average in an oversold condition and starting to turn to the upside. It has bounced to the upside very nicely in the past every time it has reached this moving average.
Please recognize the volatility of this stock, expect a bumpy ride and dimension your position and entry strategy appropriately.
Recommendation: Buy Joy Global Inc. (Nasdaq: JOYG) at market (**).
(**) – Special Note of Disclosure: Horacio Marquez holds no interest in Joy Global Inc.
[Editor's Note: Horacio Marquez knows how to make a market call. It was Marquez who told investors that lithium was going to be big – a year before other "experts" made the same call. Now Marquez has isolated the major profit opportunities being created by the possible broadband breakdown – a situation that the news media is only just now starting to understand. To find out all about those top profit opportunities, check out this new report.]
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