The U.S. equity market surged last week as the Fed raised interest rates for the second time in three months. However, the exuberance fizzled out as a token rate hike was seemingly already factored into the decision making. Investors also remained baffled by Fed’s cautious tone to trim the number of interest hikes for the year.
Despite the short-term gloom, market sentiments are likely to improve as the economy continues to recover. The one sector that is bound to profit in that scenario is the U.S. Industrials sector. This is mostly due to the sector’s high positive correlation with the economy.
Between Sep 19, 2008, and Mar 6, 2009, when the economy was plagued by the recession, the U.S. Industrial sector reportedly fell about 55% compared with 45% for the S&P 500 benchmark index.
However, since Mar 11, 2009, when the market hit rock bottom, the S&P 500 gained 224.9% to date, compared with 283.5% for the S&P 500 Industrials Index.
General Electric: Retracing Its Industrial Roots
General Electric Company (NYSE:GE), which once had undisputed dominance over the sector, has almost completed its massive restructuring initiatives to focus on core industrial operations by divesting most of the financial units under GE Capital. Perhaps the high-growth potential of the Industrial sector and the credit risks associated with the financial businesses had been the most decisive factors behind the initiative.
The transactions have mostly realigned the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. General Electric is also focusing on businesses with a digital edge, as it anticipates the future growth driver to be the Industrial Internet. With the restructuring initiatives, General Electric expects operating earnings from the industrial business to aggregate over 90% of its total operating earnings by 2018, up from 58% in 2014.
In a major hint of re-conglomeration, General Electric has further inked a definitive agreement with Baker Hughes Inc. (NYSE:BHI) to merge its Oil & Gas business with the latter. The partnership aims to arrest the dwindling sales of GE Oil & Gas business by forming an industry leader with an unrivalled mix of service and equipment capabilities.
GE Has Miles to Go
Investors had long been expecting such radical moves by this Zacks Rank #4 (Sell) stock to pull up the sagging share prices. Over the last one-year period, General Electric performed miserably compared with the Zacks categorized Diversified Operations industry, with an average decline of 5.4% as against a gain of 5.4% for the latter.
Furthermore, General Electric’s current-quarter estimates have decreased significantly from 31 cents to 17 cents during the last two months while current-year estimates fell to $1.63 from $1.65 per share. To add to the woes, General Electric has a Value Growth Momentum Score (VGM Score) of ‘D’.
Our research shows that stocks with a VGM Score of ‘A’ or ‘B,’ when combined a Zacks Rank #1 (Strong Buy) or #2 (Buy), offer the best investment opportunities for investors.
Consequently, General Electric appears to be a less attractive investment proposition at the moment compared to its peers.
Instead of looking to GE, investors might consider these 3 top diversified conglomerates instead…
Honeywell International Inc. (HON)
Based in Morris Township, NJ, Honeywell International Inc. (NYSE:HON) is a global diversified technology and manufacturing company with a wide range of aerospace products and services. Honeywell’s diversified business portfolio has the potential to earn consistent above-average returns and mitigate operating risks. The company’s diligent focus on working capital management, free cash flow generation and a conservative balance sheet remain key positive attributes amid a challenging macroeconomic environment.
The company has a VGM Score of ‘B’ and has outperformed the industry with an average one-year return of 12.0%. Honeywell has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
Hitachi, Ltd. (ADR) (HTHIY)
Headquartered in Tokyo, Japan, Hitachi, Ltd. (ADR) (OTCMKTS:HTHIY) is one of the world’s leading global electronics companies, manufacturing a wide array of products, including computers, semiconductors, consumer products and power and industrial equipment.
This Zacks Rank #2 stock has a VGM Score of ‘A’ and has outperformed the industry with an average one-year return of 18.7%.
Bunzl plc (ADR) (BZLFY)
Headquartered in London, U.K., Bunzl plc (ADR) (OTCMKTS:BZLFY) operates as a one-stop-shop distribution and outsourcing service provider across 30 countries, supplying a broad range of internationally sourced non-food products to a variety of market sectors.
This Zacks Rank #2 stock has a VGM Score of ‘A’ and has outperformed the industry with an average one-year return of 5.6%.
With the U.S. GDP expected to grow in the vicinity of 2%, Industrial stocks are poised to benefit quite significantly and could well turn out to be the next big story with exponential return prospects. President Donald Trump further intends to spend about $1 trillion in infrastructure projects over a period of 10 years. Consequently, investors could well benefit by investing in these industrial stocks that are backed by solid fundamental strength and promise a healthy return on investment.
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If the stocks above spark your interest, wait until you look into companies primed to make substantial gains from Washington’s changing course.
Today Zacks reveals 5 tickers that could benefit from new trends like streamlined drug approvals, tariffs, lower taxes, higher interest rates, and spending surges in defense and infrastructure. See these buy recommendations now >>
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