Anyone who’s been in the trade for a while knows that the industrial sector has been performing quite well over the last decade. This fact is despite that it is linked systemically to the state of the economy. However, the recent coronavirus pandemic has dealt a substantial blow to it nevertheless, and the sector has underperformed for most of 2020 and moving forward, against the broader market. This scenario is not surprising as the volume of business drops during a recession, typical of a highly cyclical sector.
However, it doesn’t hurt to examine why industrial stocks remain to have positive prospects. The general sentiment is bullish given that the outlook on the investment horizon is towards a rallying trend despite the damning blow of the economic shutdowns. As most analysts will say, buying opportunities lie where carnage is.
Current Outlook on Industrial Stocks
In a market where timing is everything, you have to know when you should buy-in. As far as the industrial sector is concerned, the cycle it is currently on is set to bottom and investing in cyclical stocks as shares reach their lowest lows is an excellent move.
The sector is gathering steam as of this writing, and several stocks are at bargain prices, even the top-tiered ones, while some are targeted for their growth prospects and fair valuations. Buying into these shares ahead of the bottoming process is highly recommended.
What are Industrial Stocks?
The industrial sector forms the nation’s backbone and comprises the businesses in the airline, construction, transportation, and defense scene. Despite its close ties with the economic situation, it’s only secondary to the primary and service sectors as the main segments. But it nonetheless needs to be durable enough to absorb a dwindling demand when market conditions are dismal.
Key factors to consider in investing
When choosing industrial stocks to invest in, one has to go after companies with a solid financial profile that can withstand economic highs and lows and have the capability to support continuous operations amidst challenging conditions.
Operating Costs
Industrial firms with low operating costs have a greater propensity to make it through tough times as they keep business as usual in the middle of bleak economic prospects. This scenario may only be possible if their financials are strong.
Top-Tier Bond Rating
Industrial firms are highly capital-intensive and depend heavily on borrowing to finance their equipment and facilities. If they have an investment-grade rating in the capital markets, they can continue to source funds at optimal rates regardless of economic ups and downs.
Diversification
As was apparent in the global lockdown that swept the world, industrial companies who have diversified into other areas of operation have seen the least financial damage since their varied portfolios served as a protection to volatile market conditions.
With these factors in mind, let’s look at the best industrial stocks this 2020 to add to your basket and position you for the years ahead.
Our Top Industrial Stock Picks
Based on Recent Performance
These companies have been evaluated to have performed well based on total return for the past year.
Axon Enterprises Inc.
This multinational company is the provider of security systems and services worldwide, specifically to law enforcement and military and private firms engaged in self-defense technology.
Recent news about a $13-million contract with the Customs and Border Protection Agency of the US government to provide almost 4,000 body cameras for their agents was released in September and bode well for their forecasts. Axon also owns the management solution for digital evidence in the cameras, which is cloud-based, and called Axon Evidence.
The company’s ability to secure a million-dollar deal in the middle of the pandemic is concrete proof of their resilience and unperturbed performance despite the global recession.
Generac Holdings Inc.
The recent acquisition of Enbala Power Networks Inc. finalized in October was a strategic move to gain leadership in the Smart Grid 2.0 technology. Even without disclosing the deal’s financial aspects, investors are confident that the move further solidified the company’s position as the primary maker and designer of generators and other products powered by engines for construction sites, commercial establishments, and residences.
Market analysts support a bullish stance in the stock as its rating has rallied in the past months and is likely to continue its uphill climb as blackouts are a regular occurrence in the US, making it a good contender for a long-term hold.
United Parcel Service
It’s only understandable that demand for this courier giant’s services dramatically increased in the past 12 months, thanks to people being on lockdown and opting to have their items shipped because they cannot drive or fly to get them. In its subsector of Air Freight and Shipping, UPS ranks first among nine stocks of a similar offering.
To give numbers to their growth year-on-year, UPS had a 20% uptick in their sales volume, and their revenue was consequently rising by 13%, including their net income.
Kansas City Southern
It may be unexpected, but in reality, the railroad business is still lucrative even in the presence of other means of transportation. If you give careful examination to KSU, you will realize that it is one of the A-rated stocks, and recent news on a potential takeover by an undisclosed company in the near-term is fueling the rise in its value for investors.
Moreover, this company has shown in its earnings report that it beat the current economic odds. It displayed a 16% rise in its financials in the past year amidst the pandemic. It is slated to continue its steadily strong performance moving forward.
Based on the P/E ratio
These stocks are highly recommended for their attractive P/E ratio, which translates to the investors paying less money for every dollar of earnings that a company generates.
Huntington Ingals Industries Inc.
Huntington Ingals is a company that designs, manufactures, and maintains ships mostly made for the Coast Guard and Navy of the US government. Apart from these, it also is a source of gas and oil services and fleet support.
Its current stock price sits around 147.70 as of November this year, and its trailing 12-month P/E ratio is at a low of 11.5 with market capitalization at a massive $6B.
Air Lease Corp
Another stock pick is Air Lease Corp, which stands strong as a worldwide commercial planes business involving leasing, sale, and purchase, and with a fleet of 308 aircraft with an additional 377 on the way. Last October of this year, the aircraft giant released a 3rd Quarter earnings report showing that its liquidity is at an enormous $7B, and it recently had a $600M investment on more airplanes to add to its existing inventory.
Its stock price as of November hovers at 31.07 and has a 12-month P/E ratio of a solid 6.0 and a market capitalization of $3.5B.
GrafTech International Ltd.
GrafTech is a carbon-based and graphite product manufacturer that also provides all related services. Its product offering includes automotive items, aluminum, electronics, silicon metal, steel-making energy solutions, petroleum needle coke, and graphite electrodes, among many others.
Its price is at 6.96 as of November of this year, has a market capitalization of $1.9B, its 12-month trailing P/E ratio is at a low of 3.4.
FedEx Corporation
FedEx is a world-renowned company engaged in e-commerce, business services, and transportation as part of its business portfolio. It has been known as the one who can give the fastest delivery service across the globe and has positioned itself as the cost leader in the market. It can provide its freight and ground transportation services to at least 220 countries, including some territories.
In its category on shipping, FedEx sits on rank 2 out of 9 stock picks, mainly due to its 12-month trailing P/E ratio of 20.45 and its display of steady earnings despite the global economic shutdowns that occurred for most of the year 2020.
Based on Growth Prospects (EPS)
The following stock picks are those that have exemplary Earnings Per Share (EPS) growth, which translate to the capability of every company on the list to grow its business and generate earnings, overwhelmingly so that it cannot re-invest or return everything to its shareholders.
Quanta Services Inc.
This company is involved in providing its contracting services in communications, gas and oil, infrastructure solutions to electric power, among other things. Its stock price as of November of this year is at 63.04, with a market capitalization of $8.8B. So far, it has displayed an excellent earnings trajectory and has an EPS ratio of 173.7%, well above the industry average.
IHS Markit
This UK-based company is a leader in the analytics, information, and solutions arena and works with other businesses, privately-owned or with the government, to make them increasingly efficient in their operations.
The firm’s 3rd Quarter 2020 earnings report showed a bottoming of its shares last March when the global lockdown began and then rallied almost 69% since then. Despite this, there is still much room for growth because of the nature of its business that is highly diversified and its strategic stance being defensive. It is also slated to have several expansions in the coming years, and hence its growth profile remains to be in the long-term perspective. It has a growth forecast of 11% in the medium term (3-5 years) and its EPS growth is at 310%.
Energizer Holdings Inc.
Energizer Holdings Inc and its subsidiaries are the world supplier of flashlights and dry cell batteries, alkaline, miniature ones, those which are rechargeable, and others which are made of carbon-zinc, automobile care, and other lighting products, among others. Its stock price is 41.12 as of November this year, and its EPS growth at a whopping 850%.
Based on Durability (Stability)
These stock picks are those that have the most dependable financials that can weather the economic downturns whenever they arise and whatever the magnitude.
3M
As mentioned earlier, diversification is vital in any business’s stability amidst the downfall of the world economy. 3M is a manufacturing firm that has achieved such with its four primary business groups – consumer, health care, electronics and transportation, and industrial and safety.
Their products are everywhere around the globe, and they number in the thousands across all markets. Thus, it can generate a steady stream of income in good times and even in bad times. It is known for re-investing at least 30% of its earnings back to the business. Thus, they are always ahead of the game compared to its competitors in terms of innovative product offerings. Another 30% goes to its shareholders in dividends, and the remaining 40% goes to acquisitions.
Raytheon Technologies
Raytheon is a contractor for defense and aerospace, and it completed its merger with United Technologies back in April of this year, which made it the industry leader in terms of cybersecurity solutions, civil government, and defense.
We can say that Raytheon has completely shielded itself from the recession that wrecked the world since the first quarter of 2020 because its stream of steady cash flow shows it. With the government as its highest-paying client and barring any changes in the budget allocation for defense in the US, the company’s earnings will continue to be unruffled by any market volatility.
The company has so far diversified into the aerospace industry and exerted efforts to boost its international sales to address this reality’s negative impact, no matter how improbable it may be in the current situation.
Waste Management
While the world is reeling from the effect of the COVID-19 pandemic, this company remained resilient to its ill-effects as it continued to provide collection, disposal, and transfer services and resource recovery and recycling to its municipal, industrial and commercial clients. It also develops and operates facilities that perform landfill gas to energy operations.
Despite the impact of the volume of waste collected from most businesses’ shutdown in the industrial and commercial sector and on its pricing strategy for electricity and recycled products, the negative effect was muted by its efforts to lower costs and widen its profit margins.
Conclusion
The industrial sector has remained robust in the middle of the pandemic-induced recession that ravished the world this year, and it will pay to give the stock picks recommended above a close scrutiny while the timing is still perfect to buy into them. As is true for any investor on traded equities, when the world is on a downward spiral, it’s not the time to pull out your investments. Instead, it’s the best time to add more.
