Industrial stocks are back in favor, and they look to remain a favorite trade on Wall Street for the foreseeable future. As the U.S. economy has heated up over the past year, fueled by tax cuts and robust consumer and business spending, Wall Street has grown bullish on industrial stocks. During that stretch, the Industrial Select Sector SPDR ETF (NYSEARCA:XLI) has rallied 17%, versus an 11% gain for the S&P 500.
This run is far from over. The simple truth is that as goes the U.S. economy, so go industrial stocks. The U.S. economy projects to remain strong for at least the next several quarters, if not the next several years. Thus, industrial stocks should remain on their uptrend for months on end, possibly even years.
Which industrial stocks should you add to your portfolio? This an industry on an uptrend, and when buying into a bullish industry, you want to pick up the winners. I have identified three such stocks to buy, and think all investors should consider holding these three industrial stocks, so long as U.S. economic conditions remain healthy.
Perhaps the most noteworthy industrial stock in the world is Boeing (NYSE:BA). Boeing is most known for making commercial aircraft, but the company also has huge (and growing) defense, military and aerospace businesses. These are good businesses to be in at this point in time. The domestic aircraft business is benefiting from tax cuts, which have given airlines a bunch of extra cash that they are putting toward new aircraft purchases.
Meanwhile, the international aircraft business is booming thanks to global economic expansion. In particular, China is a bright spot for Boeing, as China’s booming consumer middle class is creating a surge in travel demand, which in turn is forcing China to build out the travel infrastructure to accommodate this surging demand. Boeing predicts that China will buy $1.2 trillion worth of planes over the next two decades.
On the military and defense side, one of the key tenants of U.S. President Donald Trump’s platform is to increase military spend. More than that, Trump is trying to convince ally nations to up military spend, too. Specifically, the current standard for NATO is to spend 2% of GDP on military. Trump is suggesting NATO nations up that rate to 4%. It remains to be seen whether ally nations will take Trump’s advice. Regardless, military spending is growing globally with the average military spend rate at 2% of GDP. Thus, this is a moderate growth industry with a potentially huge growth catalyst if 4% becomes the global norm for military spend rate.
On the aerospace side, commercial space exploration is in the top of the first inning. This promises to be a huge growth industry, and Boeing projects to be a major supplier of this mega-growth industry. This catalyst hasn’t arrived, yet. But, at scale, commercial space exploration could provide a huge tailwind for Boeing stock.
Overall, there are many reasons to stick with BA here and now. The valuation is rich. But, that rich valuation is supported by strong fundamentals. As such, Boeing stock, which is up nearly 200% over the past three years, should continue to outperform for the foreseeable future.
CSX Corporation (CSX)
Railroad giant CSX Corporation (NYSE:CSX) has been one of the biggest winners during the Trump presidency. Owing to the inherently dangerous nature of operating freight trains, the railroad industry had become subject to intense regulation and rules over the past several years. Trump peeled back those regulations and rules, and he stopped further regulations from being enacted. The result? Revenues at CSX have bounced back, and margins have soared to record highs. Tax cuts have helped, too, and net profits are at all-time highs.
With profits at all-time highs, CSX stock has soared to all-time highs, as well. Since the start of 2016, CSX stock is up nearly 200%.
There are two ways the rally in CSX stock could get derailed: 1) the valuation gets too big, and/or 2) U.S. economic growth slows meaningfully. On the first point, CSX stock is trading above historical valuation levels, but at 20X forward earnings for what analysts see as 20% earnings growth over the next several years, CSX stock is far from being overvalued. On the second point, the U.S. economy projects to remain healthy over the next several quarters, and railroad regulation projects to remain favorable under Trump.
As such, the outlook for CSX stock to keep rallying is quite favorable. The fundamentals are strong, and the valuation remains reasonable considering renewed growth.
Investors should be aware, however, that this is a growth play, not a dividend play. Historically, investors have bought CSX for the dividend. The yield presently sits below 1.2%, which is a decade low. Thus, you don’t buy CSX stock here for the yield. You buy it because you think the stock can head higher so long as the operating environment remains favorable.
United Technologies (UTX)
Much like Boeing, United Technologies (NYSE:UTX) is a multi-faceted industrial giant with exposure to multiple stable growth arenas. The biggest of UTX’s businesses is the company’s Climate, Controls, & Security business. The company provides a suite of necessary living solutions through this business, including cooing, heating, fire safety, home and business security, and refrigeration services and products. All of these products and services have long-term stable demand that gets a near-term boost when the economy is healthy. Right now, the economy is healthy, so this business is growing at a solid 7% rate.
UTX also owns Pratt & Whitney, an aerospace manufacturer, in addition to its own aerospace systems business. Between those two businesses, UTX has exposure to all things aerospace, from engines to ejection seats to life support systems, and everything in between. Owing to its broad exposure to all things aerospace, as goes the aerospace industry, so goes UTX stock. As mentioned earlier in the discussion regarding Boeing, the aerospace industry projects to remain healthy for a lot longer, and so UTX stock will be supported by a strong aerospace business for a lot longer, too.
Last, but not least, is Otis, UTX’s world-leading elevator and escalator business. Naturally, demand for elevators and escalators is stable in a long-term window, much like UTX’s other businesses. Also, demand for elevators and escalators tends to get a boost during a capex up-cycle. We find ourselves in a capex up-cycle right now, so the Otis business is doing quite well. Revenues rose 7% year-over-year last quarter.
Overall, UTX stock is supported by multiple stable businesses, all of which are doing well right now and project to do well for the foreseeable future. That makes UTX stock, which trades at under 20X forward earnings, a buy here and now.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.