The Russell 2000 index surged last week as investors shifted their focus from large-cap technology stocks to smaller companies, spotlighting industrial stocks to buy now. This shift was driven by the anticipation of potential Federal Reserve rate cuts, which investors believe could more significantly benefit these smaller firms.
The move was catalyzed by a soft Consumer Price Index (CPI) report, which has fueled expectations that the Federal Reserve may lower interest rates in response. The rise in the Russell 2000 marked a standout performance compared to its larger counterparts, the S&P 500 and the Nasdaq Composite.
The pivot away from successful technology stocks and towards other market sectors contributed to a broader market rally, signaling a healthier stock market environment through increased market breadth.
This movement is a response to the expected stages of economic changes, which tend to affect various industries in different ways. In this case, the market is preparing for the upcoming Fed rate cuts.
Here, we look at three industrial stocks to buy now as the market rotates out of tech stocks.
Caterpillar Inc. (CAT)
Caterpillar (NYSE:CAT), known for its heavy machinery, is a leader in construction and mining equipment. Investing in CAT is attractive due to its strong global presence, robust demand for infrastructure projects, and consistent dividend growth, which offers stability and potential for long-term capital appreciation.
In its Q1 2024 results, Caterpillar reported sales and revenues of $15.8 billion, down from $15.9 billion last year due to lower sales volumes in construction and resource industries, nearly offset by favorable pricing and higher ‘Financial Products’ revenues. The operating profit margin rose to 22.3% from 17.2%, and adjusted profit per share hit a record $5.60, up from $4.91.
Citi (NYSE:C) initiated coverage on Caterpillar, assigning a Buy rating on the stock alongside a price target of $380. The positive assessment from Citi hinges on the company’s forecasted earnings growth and the expectation that Caterpillar will sustain higher margins, exhibit less earnings volatility, and continue its consistent cash return to shareholders, surpassing its historical performance.
Caterpillar projects that its Construction Industries (CI) segment will experience sales growth in 2025 and 2026, potentially exceeding investor expectations. Robust international construction equipment sales, which make up about 45% of the segment’s revenue, are likely to drive this growth.
This positive outlook stems from the long-term growth forecast for the mining sector and data center power generation demand, areas where Caterpillar has established a strong presence.
Caterpillar has recently taken significant financial steps, including an 8% rise in its quarterly dividend and the enlargement of its share buyback program by $20 billion, signaling a strong financial position and commitment to shareholder returns.
Union Pacific Corporation (UNP)
Union Pacific (NYSE:UNP) is a major freight railroad operator in the U.S. and a prime example of industrial stocks to buy now. Investing in UNP is appealing because of its extensive rail network, which supports North American trade. The company benefits from stable cash flows, operational efficiency improvements, and consistent dividend payouts, making it a reliable choice for investors.
Back in late April, UNP reported results for its first quarter. The released numbers surpassed analyst expectations with an operating earnings per share of $2.69, which outperformed the consensus forecasts $2.53.
The railroad operator’s latest financial results highlighted successful productivity initiatives, as evidenced by a lower-than-anticipated operating ratio (OR) of 60.7%. This figure was 160 basis points ahead of the consensus forecast. The operating ratio is a critical measure for railroad companies, indicating operational efficiency by comparing operating expenses to revenue.
“We remain Buy rated with a forecast of >300bps of average margin improvement in 2H24, backed by what looks to be solid traction on the productivity and cost-takeout front, and with the expectations for better YoY volume performance through 2H24,” Goldman Sachs analysts wrote in response to the Q1 earnings report.
United Parcel Service (UPS)
UPS (NYSE:UPS) is a global leader in package delivery and supply chain management. Investment in UPS is justified by its extensive logistics network, strong e-commerce growth, and strategic focus on technology and efficiency.
Wells Fargo (NYSE:WFC) initiated research coverage on United Parcel Service with an Overweight rating, citing the company’s achievable goal of $13 earnings per share by 2026. The optimistic outlook is based on UPS’s strategies for cost reduction and network consolidation.
The research firm highlighted that after a challenging period for UPS in 2023 and 2024, the current low expectations for the company present an attractive opportunity for investors. Wells Fargo’s analysis points to the $3 billion in planned cost savings from workforce reductions, network consolidations, and reduced contract cost inflation from the Teamster agreement, which will contribute to the company’s financial targets.
Last year’s settlement with the Teamsters union is expected to turn wage inflation from a hindrance into a benefit for UPS. After the initial challenging 12 months of the contract, UPS expects wage inflation to remain at just 1%-2% from August 2024 to August 2027, which is below market rates.
While Wells Fargo’s projections do not fully align with management’s targets, the firm believes that surpassing the low consensus expectations is a feasible path for UPS’s stock performance.
On the date of publication, Shane Neagle did not hold (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
