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Steve Alexander

When combining industries in this manner, the breakdown is as follows:

Heavy Machinery

It is somewhat surprising that a business as capital intensive as heavy machinery production should have such a strong presence on a screen that prioritizes high return on capital. Stocks here include specialty truck outfitter Oshkosh Truck (OSK), RV and Bus maker Thor Industries (THO), and Crane Company (CR), which makes everything from electronics for aerospace applications to vending machines.

The popularity boils down to one simple factor: lack of competition due to the very niche nature of these products. For example, very few companies are interested in competing in small markets such as fire and trash trucks like Oshkosh does. Oshkosh can basically charge whatever the market will bear. Also, the company doesn't have to spend heavily on marketing or development to fend off competition.

However, heavy equipment is a cyclical business. When customers are facing recessionary conditions, they tend to hold back on capital expenditures. The perfect storm of a cyclical bottom and low competition brings these firms to the top of the screen, where they represent some attractive buying opportunities.

Equipment

The Equipment segment consists of companies that produce somewhat smaller products than our Heavy Machinery group. In this area, stocks include Pitney Bowes (PBI), the leader in mailing and shipping equipment; FreightCar America (RAIL), which incidentally produces rail cars; and Acuity Brands (AYI), a manufacturer of lighting fixtures.

The Equipment segment in general is quite a bit less niche than Heavy Machinery. These products have a wider addressable market (for the most part). Acuity, for example, has several direct competitors such as Cooper Industries (CBE), and Genlyte Group (GLYT). Sticking with Acuity, their products are primarily used in home lighting, and everyone knows how bad the housing markets have been for nearly a year now. Equipment stocks magnify the overall business cycle. And with lots of competition and practically no switching costs, these businesses do not lend themselves to natural moats.

Materials

Some stocks in this space are Southern Copper (PCU) and Allegheny Technologies (ATI). At this point, returns look great looking back at the trailing cycle, but looking forward we could be going downhill as the cycle bottoms. Also, copper and steel is copper and steel regardless of who supplies it. Buyers can often get these materials from a variety of providers, so there is no intrinsic moat qualities to these businesses.

The one exception would be those firms that own a very unique property or have the market for a particular commodity cornered (no other competitor can get access to it). However, these situations are rare.

Aerospace & Defense

Aircraft maker Boeing (BA), and defense contractor Lockheed Martin (LMT) are good examples in this segment.

Aerospace and Defense is an interesting business. A large portion of revenues for these companies comes from government contracts for supply to the military. This, combined with the fairly limited competitive characteristics of these markets, give companies in this segment some decent moat potential. Boeing, for example, operates in an effective duopoly with European competitor Airbus . Lockheed is known as the biggest of the "big 5" defense contractors the government turns to for the majority of it's contracts. However, one needs to be aware that the reliance on government business is a double edged sword. When defense budgets expand, as they have for most of this decade, these companies do well. When defense budgets stagnate, as in the 1990's, business for these guys contract.