John P. Reese

About the Author John P. Reese

John P. Reese is considered an expert in the systematic investing methodologies of legendary investors, including Peter Lynch, Ben Graham, Warren Buffett and many others. He has been active in the development of fundamentally-based quantitative models since the mid-90s. His commentary and research on Seeking Alpha will include stock ideas, strategy related pieces, value investing concepts, behavioral finance related posts, systematic and modeling methods as well as other long term investing concepts. John is founder and CEO of Validea.com and also co-founder of Validea Capital Management, a separate account asset management firm serving individuals and institutions. John sub-advises the National Bank Consensus American and International Equity Funds offered in the Canadian market. He holds two U.S. patents in the area of automated stock analysis and is considered an expert in the field of quantitative stock selection using the strategies of investing legends. John is a columnist for TheStreet.com, Forbes.com and Canada's Globe & Mail and is co-author of “The Guru Investor: How to Beat the Market Using History’s Best Investment Strategies". He holds a master's of business administration from Harvard Business School and a degree in computer science from MIT. A more complete biography can be found here: http://en.wikipedia.org/wiki/John_P._Reese

America’s New Industrial Revolution


Not too long ago, the conventional wisdom was that American manufacturing was going the way of the dodo bird. But the resurgence of American manufacturers has been one of the great themes throughout the expansion that began back in 2009 — and in 2014, things really took off.

Industrial production jumped 4.2% last year, the highest annual gain since 2010 and the second highest since 1998, according to Federal Reserve data. The manufacturing sector expanded in each month of 2014, according to the Institute for Supply Management, with output really picking up in the second half of the year.

But while industrials — which were hammered during the recession and bear market — have outpaced the broader market since the March 2009 low (the S&P 500 is up about 200% since then while the Industrial Select Sector SPDR ETF is up more than 260%, as of Jan. 27), industrials lagged the broader market in 2014. Many are still trading at attractive valuations. With that in mind, I recently used my Guru Strategies, each of which is based on the approach of a different investing great, to uncover some of the industrials and manufacturers that have the best fundamentals. Here’s a sampling of what I found.

The Dow Chemical Company (NYSE:DOW): Michigan-based Dow uses chemical, physical and biological sciences to create products that address problems such as the need for clean water, clean energy generation and conservation, and increasing agricultural productivity. Its products, which include specialty chemicals, advanced materials, and plastics, are manufactured at 201 sites in 36 countries and go to customers in approximately 180 countries.

Dow gets high marks from the model I base on the writings of James O’Shaughnessy. When looking for value plays, O’Shaughnessy targeted large firms with strong cash flows and high dividend yields. Dow has a market cap of $53 billion, $5.26 in cash flow per share (nearly three times the market mean), and a solid 3.8% dividend yield, all of which help it pass the O’Shaughnessy-based model.

Douglas Dynamics (NYSE:PLOW): Wisconsin-based Douglas makes vehicle attachments and equipment, such as snow and ice management attachments, turf care equipment, and industrial maintenance equipment.

The model I base on the writings of hedge fund guru Joel Greenblatt is particularly high on Douglas ($450 million market cap). Greenblatt’s approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes Douglas’s 11.4% earnings yield and 59.3% ROC, which combine to make the stock among the 20 best in the entire U.S. market right now, according to this approach.

Cummins Inc. (NYSE:CMI) Indiana-based Cummins makes diesel and natural gas engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. It employs approximately 48,000 people worldwide and serves customers in about 190 countries and territories through a network of 600 or so company-owned and independent distributor locations and approximately 6,800 dealer locations.

Cummins ($27 billion market cap) gets high marks from the model I base on the writings of mutual fund legend Peter Lynch, in part because of its stellar 23% long-term earnings per share growth rate. (I use an average of the three-, four-, and five-year EPS growth rates to determine a long-term rate.) Lynch famously used the P/E-to-Growth ratio to find bargain-priced growth stocks, and when we divide Cummins’ 16.6 price/earnings ratio by that long-term growth rate, we get a PEG of 0.73. Anything below 1.0 is considered a bargain according to this model. Lynch also liked conservatively financed firms, and the model I base on his writings targets companies with debt/equity ratios less than 80%. Cummins’ D/E is 22%, another good sign.

Crane Co. (NYSE:CR): Crane makes highly engineered industrial products for the hydrocarbon processing, petrochemical, chemical, power generation, unattended payment, automated merchandising, aerospace, electronics, transportation and other markets. The 160-year-old firm has about 11,500 employees in the Americas, Europe, the Middle East, Asia and Australia.

Connecticut-based Crane ($3.5 billion market cap) gets strong interest from my Lynch-based model. The approach likes its 39% long-term growth rate and 18.4 P/E, which make for a stellar 0.48 PEG.

National Presto Industries (NYSE:NPK): Wisconsin-based NPK makes an intriguing assortment of products, ranging from ammunition to pressure cookers to adult diapers. The company ($434 million market cap) is a favorite of my Benjamin Graham-based model. It likes the firm’s strong balance sheet — Presto has a 5.0 current ratio and no long-term debt. Graham was known as the Father of Value Investing, and this strategy also likes NPK’s price — the stock trades for 14 times earnings and 1.4 times book value.