General Electric, aerospace and other industrial stocks are making huge gains on Monday following the announcement by Pfizer and BioNTech of promising signs of an effective and safe Covid-19 vaccine. Investors are now left to figure out what’s next for cyclical stocks.
If GE shares can close at these levels, it would be a significant breakout for the stock, which has traded in a tight range since the pandemic struck. The stock is higher than a recent June peak of about $8.50 a share.
GE stock is still down about 21% year to date. Commercial aerospace supplier stocks Barron’s tracks are down roughly 30% year to date, while the overall market is hitting new highs. Aerospace stocks needed a vaccine. Commercial air travel has been decimated by Covid-19 and the recovery in recent weeks has been stuck. Air travel has remained down about 60% to 70% year over year for months after bouncing back from April lows.
“At this point we would be very surprised if there is any valuation framework being applied,” Vertical Research Partners aerospace-and-defense analyst Rob Stallard wrote in a Monday research report. “This is a simple knee-jerk positive reaction in a sector where many stocks were down [40% to 50% year to date].” He sounded a note of caution and said investors could see a selloff after initial euphoria fades.
Boeing (BA) shares, for instance, trade for about 27 times estimated 2022 earnings. Looking past 2021 can help investors try to figure out how valuations compare with more-normal times. That is far higher than Boeing has traded at—looking two years out—historically.
Raytheon Technologies (RTX) stock trades for about 14 times estimated 2022 earnings. That is also a premium to history, but not as much as Boeing.
GE stock, on the other hand, trades for roughly 16 times estimated 2022 earnings. That is in line with history. GE stock has had a difficult time lately, losing investors 22% a year on average for the past three years. That is one reason its price-to-earnings ratio is down relative to other aerospace suppliers.
Industrial components of S&P 500 have made investors about 8% a year on average for the past three years. The industrial components are trading for roughly 18 times estimated 2022 earnings, similar to history.
Industrial stocks are rallying Monday too. The Industrial Select Sector SPDR ETF (XLI) is up more than 4%, pushing the ETF into the green for 2020.
Of course, it isn’t all about current valuations. As things get better, earnings estimates in 2021 and 2022—for GE and other industrial stocks—will rise, changing the price-to-earnings ratio. That looks like good news for stocks trading at more-normal ratios.
“Don’t forget the practicalities,” Stallard warned. Pfizer (PFE) expects to have 50 million vaccine doses produced by the end of 2020 and 1.3 billion made in 2021. It will take time to manufacture and distribute all the vaccines. Still, Stallard calls the vaccine development positive and one needed to kick-start an aerospace recovery.
It should spark the recovery for all cyclical stocks. Now investors have to pick the wheat from the chaff in the aerospace and the industrial sectors.
Write to Al Root at firstname.lastname@example.org