[Editor’s note: “The 5 Best Industrial Stocks to Buy Today” was previously published in February 2019. It has since been updated to include the most relevant information available.]
It’s no secret that industrial stocks move and groove with the overall economy. That was kind of a problem last year. Thanks to the worries about slowing global growth and the trade war with China, many industrial stocks fell by the wayside. The broad sector measure of industrial stocks — the Industrial Select Sector SPDR Fund (NYSEARCA:XLI) — sank by over 13% last year as investors ran from the economically sensitive sector.
But investors may not want to dump industrial stocks just yet.
Progress continues to be made on the trade front and recent meetings between the U.S. and China have gone in a positive direction. Meanwhile, here at home, economic data seems to be stabilizing after a few months of steady drops. With the Federal Reserve pausing on rate hikes and even considering cutting them, we could still see some more quarters of gains for the sector. No wonder why the sector has rebounded in a big way. XLI has jumped nearly 20% so far this year and is leading the market.
The best part is that several industrial stocks are still trading for discounts to the overall market. And with that as well as the potential for thawing on tariffs/trade, the sector could be ripe for the picking.
But which industrial stocks could make sense in today’s market? Here are five of the best industrials to buy today.
I bet if I asked you what one of the fastest growing sectors were, glass wouldn’t even make into the top five. After all, who uses glass anymore? But for industrial stalwart Corning (NYSE:GLW), glass is driving double-digit revenue growth.
That growth from glass is coming from two major factors. First off, GLW is still the fiber optics king and makes solutions for telecom networks, data centers, and networking customers. With cloud computing, the upgrade to 5G wireless and increased data usage all converging, Corning has seen demand for its fiber optic cables surge. In the first quarter, optical communications revenues jumped an impressive 20% year-over-year. With our modern lives demanding, even more, data/connectivity, Corning should see more revenue gains for its optics products.
The second factor is device adoption itself. Corning’s Gorilla Glass has become the standard on many smartphones, wearable devices, augmented reality displays and now automobile dashboards/infotainment units. For GLW, this again has translated into some impressive revenue growth.
All of this has helped profits and cash flows at the firm. After building out capacity last year, sales have translated back in earnings-per-share gains, as core EPS jumped 29% year-over-year . Moreover, GLW has continued to return excess capital to shareholders via buybacks and dividends.
With growth still at hand, Corning could be one of the best industrial stocks to own in the quarters ahead.
Like many industrial stocks, Dover (NYSE:DOV) has its hands in many soups. This includes everything from your local service station’s gasoline pump to the refrigeration units at your local grocery store. Its wide product catalog across automation equipment, refrigeration and fluid management has allowed the firm to reward shareholders over its history. DOV has managed to pay an increasing dividend for the last 63 years.
And it looks like that streak will continue.
DOV has moved forward with some restructuring plans to reduce costs and improve margins. Likewise, accreditive buyouts and bolt-on acquisitions have worked in its favor and have reduced the bumpiness in its refrigeration segment. Because of this, Dover managed to see a 29% adjusted earnings increase during the last quarter. Sales grew by 5%. This highlights that the restructuring is working and the steady nature of Dover’s product mix. Many of DOV’s products tend to be must-haves for other consumer and industrial applications. This makes them a bit immune to changes in the economy.
With a forward price-to-earnings ratio of 15.80 and a 1.9% yield, Dover could be a great industrial stock to buoy your portfolio.
Xylem Inc (XYL)
Perhaps one of the most critical commodities out there happens to be water. Moving, cleaning and storing it for our ever-increasing population is becoming a paramount issue. And Xylem Inc (NYSE:XYL) is the industrial stock to make that happen.
With its appropriate name, the former spin-off from industrial giant ITT (NYSE:ITT) makes a whole host of equipment like pumps, controllers and filtration devices for wastewater treatment plants across the globe. That’s a great position to be in. Growth in water treatment is steady and surging.
Here in the U.S., replacing aging water infrastructure has become a top priority. Moreover, XYL has quickly moved in helping utilities with smart-metering, leakage detection and other efficiency applications. That provides plenty of higher margins versus just pumps.
Secondly, Xylem’s real growth is coming from overseas. Just after its spin-off, Xylem changed its strategy and started looking towards key markets like China, the Middle East and South East Asia. Here, populations are growing and access to clean water is shrinking. Last quarter, XYL managed to score a 12% gain in adjusted net income.
The shift to higher margin products and to the emerging world has helped XYL boost its cash flows, reduce its debt and pad shareholder’s pockets as well.
At a forward P/E of 21.6, XYL isn’t super-cheap. But when it comes to industrial stocks, it has an impressive growth profile and it is worth the slight premium.
Ingersoll-Rand (NYSE:IR) could be leading the pack of industrial stocks … at least when it comes to sector moves. The firm slimmed down in a big way after the recession. And now that many of its peers — like General Electric (NYSE:GE), Honeywell (NYSE:HON) and United Technologies (NYSE:UTX) — are splitting apart, IR is building up its portfolio of products.
This time, Ingersoll-Rand made its biggest buyout ever. IR agreed to pay $1.45 billion for Precision Flow Systems from a group of private equity investors. Precision Flow makes a bunch of engineered pumps, boosters and other systems for water, chemicals and food and beverage customers. This is an easy bolt-on for IR’s current fluids management business and actually would nearly triple the size of its current revenues from the segment.
At the same, IR has continued to see more demand from its air conditioning and HVAC unit Trane. Both here and across the world, heating and cooling are often the biggest demanders of electricity/power. With global energy surging, especially in key emerging markets, IR has steadily clipped higher revenues from the unit.
All of this has made, IR a growth machine among industrial stocks. The firm saw continuing EPS grow more than 61% during Q1 and more than 24% for all of 2018.
For investors looking for a great growth industrial stock, IR is it.
iShares U.S. Industrials ETF (IYJ)
Perhaps the best way to play the surge in industrial stocks is to own them all. Here’s where exchange-traded funds can come in handy. However, investors may want to bypass the previously mentioned XLI and choose the iShares U.S. Industrials ETF (NYSEARCA:IYJ) instead.
For one thing, the IYJ has a much broader portfolio of holdings and includes more mid-cap industrial stocks in its portfolio. These mid-caps have provided plenty of growth as well as being M&A targets for the sector. It has also allowed IYJ to outperform the XLI over the longer haul. Over the last ten years, the iShares fund has managed to produce an average annual return of over 13%. At the same time, you still get plenty of large-cap industrial stocks as well. Top holdings in the ETF include Honeywell, Boeing (NYSE:BA) and 3M (NYSE:MMM).
As trade begins to thaw and the economy continues to move along, IYJ should be able to post some impressive returns. In the meantime, investors can clip at 1.3% dividend yield.
While IYJ isn’t the cheapest ETF in the world — at 0.43% or $43 per $10,000 invested in expenses — it’s certainly not high-priced. And with a strong performance and breadth of holdings, it could be a great way to play all the industrial stocks out there.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.