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Machine Tools And 600 Group – Rich Pickings

Machine tool orders are a prime indicator of the health of a country’s manufacturing sector and the machine tools  industry is an economic bellwether and one of the best and most reliable friend an investor could have. It will be the first to warn  of a manufacturing downturn and the first to indicate a coming upturn.

Capital expenditure on machine tools is hit as companies draw in their horns in expectation of a coming recession.  Similarly it is the first to rise as companies see signs of confidence beginning to return. Companies order machine tools when they expect to be manufacturing and selling a lot more goods.

2014 was a good year for the machine tool sector in the US. On the other hand 2015 was a disaster which has continued into 2016. In August 2015 US machine tool orders hit a 5 year low, dropping 10.2% on July and by  a whopping 21% on the previous August. By October it was even worse, with orders down 28% on October 2014. The causes were the strength of the dollar, the collapse in oil and commodity prices and slower growth in China.  For the UK and Europe replace the dollar with the pound and the Euro and the story is repeated. By the end of 2015 European orders were down 18.8% on the year.

600 Group (SIXH) is a UK engineering company whose main area of activity is machine tools. Its fortunes and share price have rigidly followed the cyclical pattern of statistics for machine tool orders. In a trading update issued today it  describes 2015 as a difficult year with the difficulties continuing into 2016 in both its European and US markets. Full year results are expected to be below current estimates which is very bad news, when one considers that those estimates were themselves made in the middle of a year of recession.

And this is where the company is the investors friend because its share price  faithfully, one could say almost rigidly, follows the pattern of machine tool orders. In 2011, for example the share price plummeted from 38p to less than 7.5p in August 2012.

In 2014, a stronger year for machine tool orders, it recovered to 23p but then went into decline again as orders collapsed in 2015. Last night it closed at 13p. and then responded to this mornings bad news with a 23% nosedive to 10p.

The same pattern has been repeated previously with a collapse in 2008 from a high of 57p. to a lowly 9.75p in early 2009.

So bull or bear, keep an eye on those machine tool order statistics, and rich pickings are there to be made.

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