3 Industrial Stocks to Watch as the Market Shifts


industrial stocks - 3 Industrial Stocks to Watch as the Market Shifts

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The industrial sector represents a cornerstone of the economy. Manufacturing is a crucial force behind productivity growth and innovation. Manufactured exports also contribute to the economy. Therefore, we will discuss three industrial stocks that deserve to be on your shopping list. 

Several sub-sectors make up the industrial sector. Today’s focus is on shares of companies operating in aerospace and defense, building supplies and construction, commercial supplies, electrical equipment and machinery, transportation, logistics, and waste management.

Given the advances in technology as well as the threat of globalization and competition, industrial companies need to maintain a constant competitive advantage.

According to the National Association of Manufacturers, “Manufacturers in the United States account for 11.39% of the total output in the economy, employing 8.51% of the workforce. Total output from manufacturing was $2,334.60 billion in 2018. In addition, there were an average of 12.8 million manufacturing employees in the United States in 2018, with an average annual compensation of $84,832.13 in 2017.”

Recent data from Trending Economics shows, “Industrial production in the United States declined 7.3 percent year-on-year in September of 2020… Manufacturing went down 6 percent and mining 14.8 percent.”

There are continuing question marks about the shape of the economic recovery. In such an environment, it becomes even more important to find companies likely to perform well, even in a contracting economy. Against that backdrop, here are three industrial stocks to keep on your radar:

  • Global X U.S. Infrastructure Development ETF (CBOE:PAVE)
  • Industrial Select Sector SPDR Fund (NYSEARCA:XLI)
  • Waste Management (NYSE:WM)

Industrial stocks: Global X U.S. Infrastructure Development ETF (PAVE)

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Today’s first choice is an exchange-traded fund (ETF) that provides access to companies that are likely to benefit from increased infrastructure activity in the U.S. The Global X U.S. Infrastructure Development ETF, which has 94 holdings, started trading in 2017.

The businesses in PAVE are involved in raw materials, heavy equipment, engineering, as well as construction. The top 10 names make up about a third of net assets of $328 million.

Minnesota-based distributor of industrial and construction supplies Fastenal (NASDAQ:FAST), Connecticut-headquartered equipment rental group United Rentals (NYSE:URI), and Wisconsin-based provider of industrial automation and information services Rockwell Automation (NYSE:ROK) are currently the top three names in PAVE.

Year-to-date (YTD), PAVE is up 2% and hit an all-time high in October. Trailing P/E and P/B ratios are 24.65 and 2.36. We’d consider buying the dips in the fund.

Industrial Select Sector SPDR Fund (XLI)   

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Our second discussion also centers around another ETF, the Industrial Select Sector SPDR Fund, which provides exposure to companies representing the industrial sector of the S&P 500 index. The fund started trading in 1998.

XLI currently has 73 holdings. The top 10 comprise about 40% of net assets, which stand at $13 billion. Nebraska-based railroad operator Union Pacific (NYSE:UNP), global delivery giant United Parcel Service (NYSE:UPS), and technology and manufacturing group Honeywell International (NYSE:HON) head the list of firms.

In terms of sector allocation, “Machinery” and “Aerospace & Defense” have the highest weightings (about 20% each), followed by “Industrial Conglomerates,” “Road & Rail,” and “Air Freight & Logistics.”

YTD, the fund is down about 1%. Trailing P/E and P/B ratios stand at 23.26 and 4.36, respectively. A potential decline toward the $75-level would make the fund’s risk/return profile more attractive.

Waste Management (WM)

Image of green Waste Management (WM) branded truck in the foreground and building with Waste Management flag in the background.
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Houston-based Waste Management provides waste and environmental services, including collection, transfer, disposal and recycling in North America. It also owns and operates landfill gas-to-energy facilities.

On July 30, the company announced Q2 financial results. Revenue was $3.56 billion, compared to $3.95 billion in 2019. On an adjusted basis, net income was $372 million, or 88 cents per diluted share. A year ago, it had been $470 million, or $1.11 per diluted share. 

In Q2, total volume declined by 10.3%. Due to the pandemic, management now expects total revenue for 2020 to fall by 4% to 5% YOY. 

So far in the year, WM stock is up 1.5%. The company will release third quarter 2020 financial results before the market opens on Monday, Nov. 2.

The company’s solid balance sheet and strong cash generation, as well as cost-cutting measures, should help support the share price in the coming quarters. The business is a relatively defensive play, even in a contracting economy. Any upcoming stock price weakness around the earnings release date would give long-term investors a better entry point.

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. She also publishes educational articles on long-term investing.

Tezcan Gecgil, PhD, began contributing to InvestorPlace in 2018. She brings over 20 years of experience in the U.S. and U.K. and has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Publicly, she has contributed to investing.com and the U.K. website of The Motley Fool.

Article printed from InvestorPlace Media, https://investorplace.com/2020/10/3-industrial-stocks-to-watch-as-the-market-shifts/.

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