Industrial stocks continue to claw back their losses, although the sector has not been as robust as some other areas of the market. The sector is still 10.6% below its prior 2020 highs. Those were set in the first quarter of the year, before the novel coronavirus rattled the market.
For what it’s worth, that’s about average vs. the other industries and the overall market. The S&P 500 is down 7.3% from its highs, although it was able to set new highs even after the pandemic selloff.
When considering the other 10 S&P 500 sectors, the industrial sector is in the top six when it comes to how far off its highs it is. With five sectors below it, the Industrial Select Sector SPDR ETF (NYSEARCA:XLI) is in the middle of the pack.
When it comes to performance though, it’s in the bottom half.
Over the past year, industrial stocks have lost over 4%. That’s better than three other groups. However, it lags seven other sectors, three of which have generated double-digit returns in that time.
In the end, though, that doesn’t matter. Industrial stocks have been around for centuries and they will be around for centuries more. Let’s look at seven industrial stocks that are worth buying now.
- Honeywell (NYSE:HON)
- United Parcel Service (NYSE:UPS)
- FedEx (NYSE:FDX)
- Boeing (NYSE:BA)
- 3M Co (NYSE:MMM)
- Lockheed Martin (NYSE:LMT)
- Caterpillar (NYSE:CAT)
Industrial Stocks to Buy: Honeywell (HON)
Considered by many to be a best-in-breed industrial name, it’s hard to lead off a list of industrial stocks and not include Honeywell. Unfortunately, though, HON stock has kept pace with the sector’s performance.
Yet, despite a massive selloff in the markets lately, HON stock is only down 7% on the year. Considering that so much of the industrial sector’s business is tied to the economy, things could look a lot worse.
In any regard, Honeywell has its feelers in all the right places.
The company has made its living dominating areas such as aerospace and control panels. The latter are used for a lot of things, from machinery to thermostats. Over the years though, Honeywell has built on its offerings.
It includes safety equipment, healthcare, pharma, manufacturing and supply chain management. For its buildings and city unit, the company states, “From skyscrapers to stadiums to shopping centers, drive connectivity, productivity and security for everyone in them.”
Further, Honeywell is expanding into the internet of things, or more specifically, the Industrial Internet of Things. For many investors, they like that HON stock is capitalizing on its legacy businesses, while also expanding into new frontiers.
Plus, Honeywell pays out a 2.3% dividend yield.
United Parcel Service (UPS)
Is there an industrial company better prepared to handle an influx in demand than UPS? Because of the pandemic, this logistics operator is now benefiting from a sharp rise in e-commerce sales.
That’s right — it’s not just Amazon (NASDAQ:AMZN) reaping revenue from our current situation. Big-box retailers, e-commerce venders and others have all seen an explosion in online sales. If you haven’t had the time to go through last quarter’s earnings results, just look at information from the St. Louis Federal Reserve. It shows that online sales have made up a growing percentage of overall retail sales for years. But in 2020, that figure has exploded.
In any case, that has resulted in big-time business for UPS. Revenue is forecast to climb over 9% this year, but that may be conservative. In Q3, revenue ballooned 15.9% year over year to $21.2 billion. That smashed expectations by over $1 billion.
Unless you expect online sales to slow, UPS doesn’t seem like a name to bet against. It’s currently one of the stronger industrial stocks on the market.
FedEx (FDX)
The only reason some investors interested in industrial stocks may skip over UPS is to take a closer look at FedEx.
What I love about FDX stock is the same thing I like about UPS: demand is simply overpowering the two companies. When customers can’t get enough of a companies’ goods and services, that’s a great problem to have.
Of course, one day, Amazon’s own delivery services may create a problem for FedEx and UPS. However, that problem is not one we’re seeing right now. FedEx is forecast to grow revenue by a similar amount to UPS this quarter, up 10.7%.
Moreover, it’s the company’s explosion in earnings that we should take notice of. Last quarter, earnings of $4.87 per share beat estimates by more than $2 a share.
Consensus expectations — which may now prove conservative — call for 67% earnings growth this year. That’s not a one-year gain, followed by a reversion year, either. Analysts expect almost 10% growth next year, too.
At the end of the day, shares trade at over 17.6 times this year’s forward earnings. At the very least that’s reasonable. One could even make the case that it’s cheap, given the secular trend in e-commerce sales and the earnings boom at FedEx.
Boeing (BA)
Boeing is a bit of a controversial pick down here, isn’t it? Of all the industrial stocks, this one has so many negative catalysts working against it that it’s hard to be excited.
To be frank, shares are down 55% this year and down 67% from the all-time highs made in February 2019. That’s when Boeing’s second 737 MAX jet crashed, sending the company into a rabbit hole of headaches, controversy and losses.
Throw in the fact that the aerospace industry has been ravished by the novel coronavirus, too, and many are wondering why Boeing would be a buy.
So, why is it?
Boeing is one half of a duopoly on plane manufacturing. Between Boeing and Airbus (OTCMKTS:EADSY), virtually all large jets are made by the two companies. And while BA stock may take a while to regain its crown, it can’t go much lower from here. At least, from a business perspective.
Add in that the U.S. government has a national interest in seeing Boeing survive (and really, thrive) as a defense contractor, and there’s even less reason to worry about the company’s liquidity.
Further, the 737 MAX is making progress toward getting back into flight — although whether or not consumers accept the plane is another story. European regulators just gave it the green light. Boeing now waits on the Federal Aviation Administration (FAA). But by and large, the negatives are starting to fade away for Boeing, and its future is looking brighter.
Perhaps this one is still too risky for investors who want it at a lower price. But, to me, this looks like a buy-and-throw-it-in-the-bottom-drawer kind of situation — with a multi-year outlook.
3M Co (MMM)
When it comes to industrial stocks with dependable dividends, 3M is near the top of the list. The company kicks out a 3.7% yield. That’s more than four times the yield one will get with the 10-year Treasury bond.
Better yet, MMM stock is also consistent in how often the dividend gets raised. 3M has not only paid, but has raised its annual payout for 61 consecutive years. Anytime a company has accomplished such a feat, it’s worth a look.
On the downside, 3M is starved for growth. On the plus side, it’s not seeing its revenue take a big hit from the novel coronavirus. In fact, the company is doing considerable business in the healthcare and PPE fields. That has helped offset the slower growth its seeing in its other businesses.
Revenue is forecast to fall less than 1% this year, while earnings are forecast to fall a little under 8%. However, in 2021, expectations call for 10% earnings growth, erasing 2020’s drop.
Even as the pandemic rages on, the economy is moving in the right direction. And that will bode well for the company in 2021, particularly if its strong business units stay strong.
Lockheed Martin (LMT)
Lockheed Martin is not among the quintessential industrial stocks. That’s because investors consider it more of a defense stock, which is true by industry but not by sector.
In any regard, LMT stock seems to be presenting an opportunity. In mid-October, Lockheed reported earnings, delivering a top-line and bottom-line beat for Q3. In the third quarter, the company grew revenue by 10.2% and its earnings by 8.7%. Further, management upped its guidance.
The company now expects earnings of roughly $24.45 a share vs. its prior outlook range of $23.75 to $24.05 per share. For revenue, management forecasts sales of $65.25 billion vs. a previous outlook range of $63.5 billion to $65 billion.
Despite all that, on Oct. 20 shares fell 3% on earnings and another 1.4% in the following session.
That leaves the stock trading at about 13.2 times this year’s forward earnings. Lockheed is forecast to grow earnings by more than 11% this year and 6.7% next year and just reported a solid quarterly result. On top of that, it pays out a nearly 3% dividend yield.
To me, that sounds more like an opportunity than a red flag.
Caterpillar (CAT)
Last but not least, it would be hard to leave Caterpillar off the list of top industrial stocks.
While CAT stock is highly levered to the economy, we’re not seeing the type of breakdown typically associated with a deep global recession. In fact, shares are higher, up 5% in the past month after its rally.
Why? Because it’s likely that some sort of infrastructure deal will eventually come to fruition. Whether it’s a Democrat or Republican-occupied White House, both sides have an incentive to put people to work with a big infrastructure bill.
On top of that, most of the world is looking to get back to regular life. In some cases, that’s merely a hope and not a plan. For others, though, construction, road work and other tasks needing heavy machinery will start back up. That makes 2021 a rebound year.
These two catalysts should be a boon for Caterpillar — or at least, that’s what the stock price is reflecting amid the current rally.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.