The S&P 500 generated a 24.23% return (26.44% with dividends) in 2023. Of the 11 sectors in the index, industrial stocks had the fourth-best performance, up 16.04%. Only technology (56.39%), communication services (54.36%), and consumer discretionary (41.04%) did better. 

How did smaller industrial stocks do? 

According to S&P Dow Jones Indices, industrials in the S&P MidCap 400 had a 30.10% return in 2023, the best performance of the 11 sectors. In the S&P SmallCap 600, industrial stocks returned 30.36%, the best-performing sector, behind only consumer discretionary at 30.74%.

So, as you can see, industrial stocks in the S&P Composite 1500, which makes up the three sub-indexes, had an excellent year.

Fidelity Investments’ outlook for industrial stocks in 2024 is quite encouraging. David Wagner, Fidelity Sector Portfolio Manager, stated: 

“I believe the current environment offers reasons for bullishness on industrials. After decades of underinvestment in the U.S. industrial base, supply-chain difficulties during the pandemic and geopolitical tension have highlighted the advantages of greater U.S. self-sufficiency.”

So, industrial stocks should do well in 2024 and beyond unless we go into a severe recession this year.

Here are three that are set for success, one from each sub-index. 

Deere & Co. (DE)

Representing the S&P 500 is Deere & Co. (NYSE:DE), One of the world’s leading agriculture and construction equipment manufacturers. In recent years, the Moline-based company has emphasized technology innovation for its end-user customers. 

The more technologically advanced its customers are, the more profitable and successful they will be, leading to further purchases of their products. It’s Business 101. 

The company estimates that its three addressable markets, Production & Precision Agriculture, Small Agriculture & Turf, and Construction & Forestry, generate more than $150 billion annually. 

In 2015, Deere’s OROA (operating return on operating assets) was 15%. In 2022, it had increased to 40%. In 2022, its SVA (shareholder value added) — defined as NOPAT (net operating profit after tax) minus its cost of capital — was $5.8 billion, the highest amount since the company started using SVA as a critical measure in 2001. 

DE stock is up 131% over the past five years, 1.7x the index.   

Lincoln Electric (LECO)

Lincoln Electric (NYSE:LECO) represents the S&P MidCap 400. It has a 5-year return of 151%, 3x the index. I recently recommended the welding company’s stock as an income opportunity in addition to its capital appreciation potential. 

Although its bread-and-butter is welding equipment, I like its move into DC fast EV chargers. American-made, they’ll do very well once America gets back on the renewable energy bandwagon. 

In June 2020, I wrote about 10 cash-rich stocks to buy for peace of mind. The two metrics I used were free cash flow to net income, an indication of how much free cash flow a company generates from its net income — more than 100% is ideal — while the second was total cash to total debt. The higher, the better. 

In the trailing 12 months ending September 30, 2023, Lincoln Electric’s free cash flow was $572 million, 115% of its $498 million net income. It’s over 100%. That’s good. Its cash was $343 million, 31% of its $1.11 billion in total debt. While it’s not overly cash-rich, it has plenty for its capital allocation decisions. 

Its 1.3% yield is an excellent industrial stock for total returns.     

Mueller Industries (MLI)

Mueller Industries (NYSE:MLI) represents the S&P SmallCap 600. It’s the top stock from a performance perspective over the past five years, up 259%.

The Memphis-based industrial company’s first sentence in its November presentation emphasizes why you must own MLI stock: “Profitable throughout all economic cycles.”

It doesn’t get much better than that. Or does it? 

Mueller specializes in manufacturing copper and copper alloy products for many uses, including building construction, appliances, defense, energy and automotive. It also produces products made from aluminum, steel and plastics. Given it’s been around since 1917, it’s learned a thing or two about manufacturing quality products, which has led to tremendous financial performance. 

Here are a few key numbers.

Its EBITDA margin in 2022 was 23% on $4.0 billion in revenue. It had a net debt of $0 at the end of 2022. That hasn’t changed. It’s got a net cash position of $1.07 billion. Its return on invested capital is a high 42%. About 85% of its $4 billion in revenue have operating margins of 24-29%, which helps explain its $11.64 per share earnings in 2022.

Its products touch every part of America. The demand for its products isn’t going away. 

As for cash-rich companies, it meets the test. In the trailing 12 months ended Sept. 30, its free cash flow was $658 million, 106% of its $623 million in net income. Its cash was $1.11 billion, 3,154% of its $35 million in total debt.

What’s not to like?

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.