JOYG Joy Global Inc. (MM)

With all the fears about the Chinese economy slowing down from 10% to sub 7% growth, it's no wonder that cyclical sectors like industrials, materials, and energy have been the laggards in the past year. Indeed, it's almost enough to make an investor ask if the global boom is winding down as the strongest developing engine sputters.

Here's what the broad sectors look like in the past year...

But, the stock market is at nearly four-year highs and many cyclical stocks have contributed greatly to the push higher because the global economy is in better shape than most strategists predicted a couple of quarters ago. So it helps to look at the "market of stocks" as well to sort out the winners from the losers.

Below is performance comparison for 8 cyclical stocks over the past 6 months, not far from the 52-week lows for the indexes and many of these names. I am showing an energy concentration to highlight a broad and deep sector where stock-picking mattered a lot, even with crude oil surging to $110 a barrel.

Big Winners: CAT, NOV, EOG

What do Caterpillar (CAT), National Oilwell Varco (NOV), and EOG Resources (EOG) have in common besides surging about 35% in the past 180 days?

Each has dominated their industry with earnings momentum. CAT is the dominant maker of heavy construction machinery with strong sales to China and other developing economies. NOV provides equipment and services to energy E&Ps and maintains high margins doing it. And EOG is one of the winners in domestic production of oil from North American shale deposits.

Under-Performers: FCX, JOY, APC

Metals and mining have been softer sectors as China slows its pace of infrastructure development. Early in the week, we heard from giant iron ore miners BHP Billiton and Rio Tinto that they see less demand for the essential steel-making ingredient this year as their biggest customer turns focus to other areas of her economic future and tries to release the hot air from a levitating real estate bubble. Clearly Freeport McMoRan Copper & Gold (FCX) and Joy Global (JOY) have felt the slow down.

Anadarko Petroleum (APC) is a quality E&P that is still making the transition away from heavy natural gas production. Since that efficient, clean-burning "fuel of the future" is so abundant and so darn cheap, many producers like APC have seen a decline in profits in the past few quarters. This has also been a problem for JOY as nat gas competes with coal and wins at these prices. Thus demand for machinery to mine coal has seen a decline.

The Biggest Loser: BHI

Baker Hughes (BHI), continues the theme of "nat gas blues" that I wrote about last week. BHI bought another oilfield services company, BJ Services, last year and has had to spend considerable time and resources shifting its business away from nat gas rigs to more "oily" liquids and petroleum equivalents.

On Wednesday, BHI warned that operating profit before tax for the first quarter is expected to be lower than the fourth quarter of 2011 because of "rapidly changing" market conditions as described above.

The Market Performer

I put Exxon Mobil (XOM) into the mix just because they are the biggest and most-diversifed of energy companies. It should be no surprise that their fortunes are more balanced in this regard, with neither gangbuster growth, nor over-exposure to any one sub-industry of oil and gas companies. And obviously, with a large market-cap weighting in the S&P 500, it's performance and beta are highly correlated to the index.

I am very curious to see if the energy sector catches up to the rest of the market in the next few months on higher oil and gas prices. I will revisit this topic and these names during the April-May earnings season. Either way, good stock-picking in strong sub-industries will remain crucial to investment out-performance.

Kevin Cook is a Senior Stock Strategist with Zacks.com
 
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