Old-line American manufacturers have spent the recession cutting costs and improving efficiency so they can greet economic recovery as lean, mean fightin' machines.
Stocks of cyclical companies took off a year ago, only to be knocked back as hopes for a quick end to recession were scuttled. They've been doing well lately, but would start really zooming again once a recovery kicked in.
"The industries that got the country into trouble in the first place will now get it out of it," predicted Eli Lustgarten, analyst with LTC PaineWebber Inc. "Economic recovery will be slow and there will be continued weakness overseas, but prospects look good if we use 1993 as our focus."
For example, Ingersoll-Rand, a high-quality component supplier in construction and industrial equipment, derives 15 percent of profits from highway-related sales and 10 percent from the housing industry. Its stock is recommended by Lustgarten.
He also likes TRINOVA Corp., a big industrial and automotive supplier in power equipment and plastic products; Cincinnati Malacron, a machine tool and plastics machinery firm; and Allied-Signal Inc., a turnaround situation in the aerospace, automotive and fibers field, whose earnings should improve later this year and shine in 1993.
"Many investors gave up hope on cyclicals, but they have improved themselves tremendously by concentrating on efficiency," said Albert Ruback, portfolio manager of Fidelity Select Industrial Technology Fund, up 26 percent in 1991 and up 14 percent this year.
"Inventories are low, which is good news for these companies, so when the economy turns they will prosper soon thereafter."
Cummins Engine, a maker of heavyduty engines which many analysts had given up on, had dramatically improved earnings in the fourth quarter due to cost reductions. It should do even better when the economy improves, Ruback said.
Another pick is earth-moving giant Caterpillar Inc., which, despite its worrisome United Auto Workers strike and low revenues, has been improving its profit margins.
A hiring freeze and the loss of 2,000 employees through attrition has trimmed costs, and Ruback expects 1994 earnings to be significantly higher.
"The more cyclical in nature a stock is, the more careful the investor must be, since attitude toward many of these stocks can turn quickly," warned Daniel Cantor, electrical equipment and appliance analyst with Stein Roe & Farnham. "We choose those that are less worrisome, and most of these are seeing an upturn in orders."
General Electric is a good cyclical stock worth buying because it is attractively priced and its plastics, NBC and lighting divisions are poised to do better, Cantor believes.
Meanwhile, Hubbell Inc., an electrical firm which has enjoyed incredible profit growth for 34 years with its wiring devices, is a good bet. It has practically no debt and its stock could split, Cantor said.
"The only worry is an upward movement in interest rates, which would push down the stock prices," said John Flanagan, steel, aluminum and homebuilding-related analyst with Stein Roe & Farnham. "However, I believe the housing industry will be leading the nation out of recession."
Kaufman & Broad, a homebuilder specializing in first-time buyers, is a Flanagan pick. Another is Centex Corp., a diversified homebuilding and construction firm.