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Revving Up Industrials

Richard Croft
February 6, 2011
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There probably aren’t enough “industrial” stocks in Canada to warrant an index and a corresponding tracking fund. But Canadian industrials have been on something of a roll, as economic growth gathers momentum.

In the general excitement over commodities and commodity stocks, like mining, oil and gas, and agriculture, the seemingly dull, plodding industrial sector gets pushed way down on the playbill. Yet these companies – in transportation, engineering, heavy equipment, and infrastructure – have sprung to life with the economic recovery.

Canadian National Railway Co. (TSX: CNR, recent price $67.55), for example, reported an 18.6% year-over-year increase in fourth-quarter earnings, after special items, on revenues of $2.1 billion. Finning International Inc. (TSX: FTT, $29.31) sells and leases heavy equipment in Western Canada, the UK, and South America, and business is booming. SNL-Lavalin Group Inc. (TSX: SNC, $59.41) is a global engineering and infrastructure company with operations in 100 countries.

More aggressive options traders might consider taking bullish positions in optionable industrials like these, betting on still more upside as global economic growth expands for another year, but especially in the US.

The most straightforward strategy is to buy calls on the three aforementioned companies. Especially now, as options are relatively inexpensive. With CNR you might consider buying the June 68 calls at $2.50 per share. For FTT, the June 30 calls at $1.50 look interesting. And finally, SNC, consider buying the June 60 calls at $3.05.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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