Diversified Operations Outlook: Near-Term Prospects Bright

Multi-sector companies’ prospects are highly correlated with healthy operating conditions of the end markets they operate in — like the oil & gas, industrial, aerospace and many others. Few prevailing headwinds are raising demand for air travel globally, improving operations in oil and gas industry, demand from the defense and governmental front as well as technological upgrade in manufacturing processes.

Also, healthy domestic and global economies create a favorable environment for these multi-sector stocks. Global economic growth is projected to be 3.9% in 2018 compared with 3.7% in 2017, with the improvement likely to propel many advanced and emerging nations and various end markets worldwide.

For the United States, growth rate of the economy is predicted to be 2.9% for 2018 compared with 2.3% in 2017 while emerging nations, collectively, are anticipated to grow 4.9% in 2018 compared with 4.7% in the prior year.

For multi-sector companies in the United States, investors’ confidence seems to have strengthened lately, underpinning bright growth potential in the near term. Healthy economic growth is complemented by a favorable labor market, changes in tax policies, growth in the manufacturing sector and governmental development plans. However, trade disputes between the United States and foreign nations, arising out of tariff imposition on number of items have, to some extent, inflated raw material costs and put pressure on corporate margins.

Industry’s Near-Term Returns Slightly Better Than the S&P 500

Looking at shareholder returns over the past month, it appears that the industry and the S&P 500 have roughly followed the same pattern. Strengthening economic conditions, favorable impacts of changes in tax policies and impressive results by many conglomerates have boosted investor confidence in the industry. The industry reached an all-time high of 6.9% on Jul 31.

The Zacks Diversified Operations Industry, a 19-stock group, is the only industry within the broader Zacks Conglomerates Sector. The industry, in the past one month, has yielded 4.6% return, modestly above the gain of 4.4% by the S&P 500.

                                        One-Month Price Performance

Diversified Operations Stocks Trading Cheap

The industry’s valuation is really cheap now. One might get a good sense of the industry’s relative valuation by looking at its price (P) to earnings (E) ratio. This metric is a suitable multiple for valuing companies within Diversified Operations industry. This clearly shows that how much an investor is willing to pay for every dollar earnings of a stock.

The industry currently has a trailing 12-month P/E multiple of 18.79, lower than 19.55 of the S&P 500 over the past month. Cheap valuation along with the company’s healthy price performance in the past month makes the industry an attractive investment destination.

Also, the valuation over a wider timeframe underpins the industry’s current cheap valuation. The current multiple of 18.79 when compared with the highest level of 19.97 since the beginning of the year shows that there is plenty of upside potential left. Moreover, the industry seems inexpensive when compared with the market at large, as the high and median multiples for the S&P 500 are 21.97 and 19.73, respectively.

                                              Price-to-Earnings Ratio (TTM)

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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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