Our limited trading last quarter focused on repositioning our industrials investments and managing our exposure to the sector. That included trimming Masco Corp. (tkr: MAS), which sells a diverse set of products to the home improvement and new home construction markets, and buying a position in Eaton Corp. (tkr: ETN), which sells industrial-grade electrical solutions to several different industries.

Masco was our largest overweight to the market, partly because the stock has performed exceptionally while we have owned it and partly because we added more in January. Masco turned around its money-losing cabinet business by focusing on the more profitable home center and dealer channels, it spun off its installation division, and its input costs fell. As a result, Masco’s margins have expanded tremendously over the past several years, and the stock’s valuation has increased in tandem. We trimmed Masco to a 2% position from 3.5% during the quarter because, while we still like the company and its end-market exposure, we found it appropriate to take some profit and reduce the large overweight position. We have found some evidence that leads us to believe Masco’s margins may be topping out. Management believes that the cost of materials has bottomed, including base metals, hardwood, titanium dioxide (a basic component of paints), and resins. Product mix has improved, but margin guidance suggests it will be insufficient to offset higher input costs going forward. We still like Masco as a long-term play, and continue to own more than the market. Housing data overall are on the upswing, suggesting growing revenues from the new construction market, and the company should meanwhile maintain steady cash flows from the repair and remodeling market, which makes up about 83% of Masco’s revenues.

After trimming our Masco position, we purchased a 1.5% position in Eaton Corp. (tkr: ETN). The majority of its sales derive from power generation and distribution products. It also sells electrical solutions to the more cyclical hydraulics, aerospace, and vehicle industries. Eaton is likely to benefit from the adoption of increasingly energy-efficient government standards, is undervalued relative to the industrial sector, and pays an attractive dividend. Adding Eaton helps maintain our portfolio’s industrials sector weighting.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.