Over the past two years, the global economy has been in a synchronized slowdown. Around the world, economic growth is now at its lowest level since the global financial crisis. While this slowdown has a lot of moving parts, the core of it can be summed up quite simply.
The U.S.-China trade war started in January 2018. Over the subsequent 18 months, that trade war only got worse. The perpetual escalation of trade tensions frightened corporate leaders around the globe. As those corporate leaders became increasingly worried about the tumultuous and uncertain geopolitical backdrop, they cut capital spending. Capital spending fuels the economy. When capital spending drops, so does economic activity.
So, when it comes to the global economic slowdown over the past two years, it all comes down to a drop in capital spending, which is a byproduct of escalating global trade tensions. The key to an economic rebound, then, is for global trade tensions to ease, and for that easing to spark a rebound in corporate confidence and capital spending.
That’s exactly what is starting to happen.
U.S.-China trade tensions have eased in a big way over the past few weeks. As they have, corporate confidence has rebounded. This reinvigorated confidence will lead to a capital spending rebound over the next few quarters, and this capital spending rebound will provide a boost to the whole economy — and an especially big boost to industrial stocks which rely heavily on capital spending.
With that in mind, let’s take a look at five industrial stocks to buy as capital spending rebounds.
Industrial Stocks to Buy: Intel (INTC)
Industry: Semiconductors
One stock which looks particularly attractive as capital spending trends rebound over the next few quarters is global semiconductor giant Intel (NASDAQ:INTC).
Intel supplies processor units for computer systems, internet of things devices and other infrastructure across the entire information technology sector. When corporate confidence is high in the IT space, IT companies spend an arm and a leg on these processor units, and Intel’s revenues shoot higher. But, when corporate confidence is low in the IT space, companies cut back on semiconductor spending. That’s when Intel’s revenue trends flatten out.
Over the past few quarters, capital investments into the semiconductor space have dropped thanks to increasing geopolitical tensions and Intel’s revenue trends have fallen flat.
But, with trade tensions now easing, capital investments into this space should ramp back up. Smartphone companies should spend big on their 5G devices in 2020. Data center giants will re-up spending on infrastructure expansion. Internet of things companies will get back to investing big in the next generation of smart devices.
Demand in the IT space was temporarily sidelined by rising geopolitical uncertainty. That uncertainty is now fading, so demand should re-accelerate higher. As it does, Intel’s revenues, profits and INTC stock will all move higher.
Advanced Micro Devices (AMD)
Industry: Semiconductors
The bull thesis on chip maker Advanced Micro Devices (NASDAQ:AMD) is very similar to the bull thesis on Intel. That is, both companies are built on the back of IT capital spending. As IT spending trends improve over the next few quarters, both AMD and INTC stocks will move higher.
There’s just one very important difference between the AMD and INTC growth narratives. Intel is losing market share. AMD is gaining market share.
Long story short, Intel has always been the Goliath in the CPU space to AMD’s David. But, David has landed some big hits against Goliath over the past few years. Specifically, AMD has been ahead of Intel in terms of next-gen product releases, and has leveraged this faster innovation to rapidly expand share in the processor market.
This is a huge market. AMD is a relatively small company. So long as AMD keeps gaining CPU share and IT spending trends remain favorable, AMD stock should stay on a long-term uptrend.
3M (MMM)
Industry: Industrials
Global industrial giant 3M (NYSE:MMM) goes as the global manufacturing economy goes. Because the company makes products which are sold directly into manufacturing end markets, when demand in those manufacturing end markets is strong, 3M’s revenues and profit trends are similarly strong. The opposite is true, too.
Thanks to escalating global geopolitical uncertainty, there was a long stretch from January 2018 to mid-2019 wherein global manufacturing activity (as measured by Purchasing Managers Index readings) was falling. As it did, 3M’s revenue and profit trends deteriorated, and MMM stock dropped. And I’m talking about a drop from $260 to $150.
But, over the past few months, global manufacturing activity has rebounded. MMM stock has rebounded, too, from $150 to just under $170.
So long as geopolitical tensions continue to ease — and they should — then global manufacturing activity should continue to rebound. As it does, 3M’s revenue and profit trends will improve, and MMM stock will continue to bounce back.
General Electric (GE)
Industry: Industrials
Very similar to 3M, global industrial giant General Electric (NYSE:GE) goes as the global manufacturing economy goes.
General Electric is a big and complex business with a lot of verticals which service many different end markets. But, in a nutshell, all of General Electric’s end markets are in the manufacturing economy (think lighting solutions, airplanes and energy). Thus, when the manufacturing economy is firing on all cylinders, General Electric is, too.
The bull thesis here is very simple. Global manufacturing activity is rebounding. That means demand in GE’s end markets is rebounding. As a result, GE’s depressed revenue and profit trends should also rebound, as should GE stock.
An important addition to that bull thesis: Management continues to de-lever its balance sheet, improve cash flows and simplify the business model. In so doing, General Electric is giving investors confidence that this company will not: 1) buckle under the pressure of too much debt, 2) fail to sustain positive cash flows and 3) repeat its mistakes of getting too big for its own good.
Management is continuing to take the right steps here. Couple those steps with a sustained rebound in global manufacturing activity, and GE stock should be higher for the foreseeable future.
Microsoft (MSFT)
Industry: Information Technology
In the information technology world, one global tech giant which should benefit big as capital spending rebounds is cloud giant Microsoft (NASDAQ:MSFT).
When it comes to MSFT stock, it’s all about the cloud. When the company’s cloud businesses are firing on all cylinders, MSFT stock works really well. But, when they aren’t, the stock doesn’t work as well. The problem is that Microsoft’s cloud businesses partially rely on enterprise IT sales, so when capital spending in the IT sector is down, Microsoft’s cloud businesses aren’t firing on all cylinders.
The good news? Capital spending trends in the IT sector are rebounding. Another excellent catalyst comes from Microsoft recently winning the U.S. Department of Defense’s highly publicized JEDI cloud contract, beating out top dog Amazon (NASDAQ:AMZN). The implication? Maybe Microsoft, not Amazon, has the best infrastructure cloud business in town.
Connecting all the dots here, it’s easy to see enterprise demand for Microsoft’s cloud services roaring higher in 2020. As demand trends do improve, MSFT stock should roar higher.
As of this writing, Luke Lango was long INTC and MSFT.
