Great Examples of the Economy’s Turnaround

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

While the troubled financials aren’t impressing the market, the parade of big company ratings upgrades continues. Companies like U.S. Steel, McDonald’s, Archer-Daniels Midland, IBM, and CBS Corp. are all getting upgraded by Wall Street along with their earnings expectations for the future. I think the stock market is overreacting to the recent reporting from the big banks. Everyone knows they are still in terrible shape. I think it’s more important to listen to what large-cap technology companies are saying. The financials are likely to be in the doldrums for the rest of the year.

General Electric Co. (NYSE/GE) reports this week, and it will be very interesting to see what this conglomerate says about its global operations. Speaking of benchmark stocks, one company you want to keep an eye on is E-House (China) Holdings Ltd. (NYSE/EJ). This ADR is worth just over a billion dollars on the stock market and is perhaps the most important benchmark stock for China’s equity market.

This company is a full-service real estate company and it operates throughout China. What it reports is a really good barometer on the state of the Chinese economy and whether or not it’s in a bubble. E-House doesn’t usually report its fourth-quarter and year-end numbers until early March, but keep an eye on it anyway. Where E-House goes, so do most other Chinese stocks.

While the broader market is focused on large-cap financial institutions, there are some significant earnings surprises so far. Cree, Inc. (NASDAQ/CREE), a $7.0-billion dollar company that you likely never have heard of just blew away consensus estimates, as the Durham-NC manufacturer of LED lightbulbs saw its profits more than triple on strong sales growth. The company’s sales grew 35% in its latest quarter and it raised its earnings expectations for the future. The stock just hit a new record high. Who would have thought that reinventing the lightbulb would be so profitable?

And, it’s not all doom and gloom in the investment banking industry. Wall Street firm Jefferies Group, Inc. (NYSE/JEF) saw its total sales triple on a strong resurgence in investment banking fees. Net income beat consensus estimates by $0.10 a share and the company is so confident in its future that it just reinstated its dividend.

And, finally, there’s Parker-Hannifin Corporation (NYSE/PH). This $10.0-billion Ohio company that you’ve never heard of makes hydraulics, which it sells to industry and aerospace markets. This company just beat consensus Wall Street estimates and experienced a major sequential turnaround in revenues and earnings, while providing a rosy picture for the future.

So, don’t let the headline action in the broader stock market fool you. In the real economy, things are beginning to turn around.