Post-Election Confidence Boost? (Elliott Gue)

Teaser picks revealed from Personal Finance

By Travis Johnson, Stock Gumshoe, October 18, 2010

Welcome back, me! Thanks to the many kind words from readers who missed my daily missives … we’re back on schedule now, and ready to again amuse, delight, and hopefully enrich you every day. Or almost every day, at least.

And today, we spin the big teaser wheel and the ticking stops at Elliott Gue — he’s got a teaser running for his Personal Finance newsletter … and while we’ve identified several of his picks before, including his “resource depletion” ideas back in August and, for a different one of his newsletters, his “Rockefeller takeover target” just a few weeks ago.

Today, I’m reading that he thinks that business confidence will shoot up in the months ahead thanks to gridlock after the election, and that he’s got at least one “bonus” idea that he thinks will perform well in that environment. So let’s sniff out exactly which stock that is, shall we?

Here’s how Gue briefly sets the stage:

“I’m telling them—and you—to expect confidence to shoot up after the November election.

“Reason: The extravagant spending and enactment of entitlements that fueled business distrust of Washington will almost certainly end when the election dust settles. Politicians from both parties know the nation has little stomach for big spending.

“Large and small business alike will view this as reassurance that government will be unwilling—or unable—to spend recklessly. Not because of suddenly acquired wisdom—because of good old-fashioned gridlock and fear of losing their office.

“This will act like a shot of B-12 in the arm for companies holding cash, but fearful of investing for future growth. With the fear eased—or removed—watch them take off!”

So, a logical argument, though I don’t know if things will work quite that cleanly. What, then, is his stock pick for this environment?

“We’re buying this company because it’s a perfect fit for our strategy. It features seven business segments—transportation, industrial packaging, food equipment, power systems and electronics, construction products, polymers and fluids, and decorative products.

“We love how its revenues are evenly spread across all segments, none of which accounts for more than 15 percent of the overall top line.

“Best of all, revenues keep rising boosted by an overseas tailwind that allows the company to generate almost 60 percent of its revenues outside the U.S.—as it waits for the economy here at home to rev up.

“When the post-election confidence injection kicks in: watch out! Profits will soar to even greater heights.”

So who is it? The Thinkolator tells me that this must be …

Illinois Tool Works (ITW)

ITW is an industrial conglomerate, a company that has quietly grown by acquiring small manufacturers and similar companies over the past couple decades, and it’s their skill at integrating and optimizing the operations of their acquired companies that stands out as their strongest asset. The seven main divisions do match up pretty precisely with the teaser, and Illinois Tool Works does have both a very broad footprint and a large international presence (they own 825 “business units” in 52 countries).

This is, at the very least, an interesting company — they’re big, with a market cap of about $20 billion, but they believe in small: they like to manage small, niche companies with high-margin products that have a strong market position, so they own dozens of valuable brands (though as an industrial company, none of them are brands that most of us would recognize). And when their companies or segments get too big, they break them up into smaller divisions to make sure that the focus is always at the local level and on the division’s customers.

They have been very cyclical, as an industrial company that supplies many products to other small manufacturers and similar firms around the world (one of their most famous products, by way of example, is the little plastic buckle that’s on almost every backpack), and they took a big hit in 2009 … but they are storming back pretty nicely in a cyclical recovery, and they did still manage to post pretty solid free cash flow even last year. Unlike companies that seem to “manage” their earnings precisely, Illinois Tool Works pretty consistently reports far higher free cash flow than they do earnings, which is encouraging. They also have a generally good reputation and solid balance sheet, with a very manageable amount of debt. The shares trade at a slight premium to the PE ratio of the S&P 500 (ITW has a trailing PE of 16), but analysts see the growth that they’re experiencing this year continuing pretty nicely — they’re expected to top out at as much as 60% earnings growth thanks to the recovery for this full year, and to grow again by 20% next year, which is pretty heady earnings growth for a $20 billion company (that means the forward PE is a bit under 14).

And yes, ITW also pays a very decent dividend of just under 3% and is a dividend growth champion — they bumped up the dividend quite nicely this year, more than 10% … the dividend growth may not remain at that level, but they have raised the dividend every year for nearly 50 years and that’s not a pattern that companies like to break unless they absolutely have to. So ITW is not likely to be a barnburner, but Morningstar does peg its fair value at $60 and the price (at just under $50) does seem reasonable for the kind of continued growth and steady performance that this company has provided for much of its hundred+ years — which means that probably investors are nervous about their big earnings dip in 2009, or they’re worried about the impact of another possible down cycle on ITW’s numbers.

As for me, I haven’t looked at ITW in years, not since they acquired a stock I owned back in 2006 … but I think I will dig in and take a deeper look now. What do you think? Let us know with a comment below.


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15 Comments on "Post-Election Confidence Boost? (Elliott Gue)"

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greggs
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greggs
October 18, 2010 11:37 am

Has anyone figured out the tease from Agora about a nuclear bomb from a
B52 lost over Greenland?

Sharon
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Sharon
October 18, 2010 12:35 pm

Vector Vest rates it a buy as of mid Sept, and Patty on CNBC has it as a buy ITW
has a 2.45 short ratio, so that's not bad, let's see if it takes out the 52W high- 52.72

GerardS
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GerardS
October 18, 2010 12:43 pm

anything about Greenland is regarding rare earth metals nowadays

JamesW
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JamesW
October 18, 2010 1:02 pm

I don't know anything about ITW, but I wonder whether we will ever get to a point where the ability of a company to create new jobs and help in Main Street recovery will be a factor in where to invest.

yankeelover
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yankeelover
October 18, 2010 5:08 pm

If business confidence will shoot up in the months ahead thanks to gridlock after the election: then we can say that in advance of the 2008 election, investor confidence took a dive and now the pendulum is starting to swing the other way. Looking ahead to 2011 when the pendulum has swung there will be some opportunities in anticipation for the 2012 results. So during gridlock (after the election and during 2011) the market will remain volative but selective.

john
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john
October 19, 2010 11:54 pm

sorry message from john addresses greenland minerals and energy. check out the move on MCP rare earth mine in california getting retooled for full production.

shoeless
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shoeless
October 20, 2010 7:22 am

With the natural gas glut due to horizontal drilling,etc…electrical generation will be increasingly produced with NG.This puts $ per KWH for neuc electrical generating plants out of line. and subsequent new contruction projects have been put on hold;therefore, demand for CCJ product will be diminished..at least in the US…We are potentially going to be a net exporter of natural gas and ticker,LNG, is so convinced they are building a terminal. They are the only company in the US at this point. They're on my wait list.

Bruce
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Bruce
October 20, 2010 12:56 pm

What's with your ad on 7 lies regarding healthcare?? Are you endorsing this information? How about doing some of your gumshoe research on this? It seems to me their claims on playing or maybe preying on the fears of lots of desperate dying people. Some potentially quesionable ethics here.

Gravity Switch
Admin
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October 20, 2010 1:06 pm
Hi Bruce, I don't endorse any of the advertisers on the site or in the email newsletter. I often write about advertisers and their promos (and have occasionally had ads pulled for this reason, which is fine — I never let advertisers impact my choice of topic), but I can't say that I have any expertise in the field or any proficiency in analyzing medical or non-investing newsletters, so I'm unlikely to write about them. I'd certainly encourage any "Health Gumshoe" out there to do so, there are a lot of health and lifestyle newsletters and many of them promote… Read more »
Paul
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Paul
October 18, 2010 11:50 am

Greenland Minerals and Energy

Jay
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Jay
October 18, 2010 1:10 pm

Or GDLNF on the pinks

Rob Vinson
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Rob Vinson
October 18, 2010 1:56 pm
A B-52 did crash in Greenland. However, all of the weapons onboard were recovered, along with a lot of snow and ice that was collected as suspected "radioactive" materials (all containerized and shipped back to the U.S.). There is an old movie with Jimmy Stewart in it that contained the story fo the crash but I don't remember the name of the movie. In the movie it was a B-29 that crashed but Holywood took some liberties. I was not involved in the recovery effort on the B-52 (it was before my time but I was stationed at Thule AB,… Read more »
phil
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phil
October 18, 2010 12:26 pm

what is their symbol i can't find it thanks

F.M.
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F.M.
October 18, 2010 12:34 pm

GGG.AX Its an Aussie firm.

Bigg Fredd
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Bigg Fredd
October 20, 2010 4:41 pm

Since a major problem with new finds of precious metals, rare earths and other raw materials is that they are in Wild and Woolyville, it seems a good play to buy producers of mini reactors. They can be transported by truck, buried on location, and last 30 years without maintenance.

An alternate play would be the suppliers of the radioactive fuel.

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