The best industrial stocks for the second half of 2023

The importance of investing in industrial stocks

“The sector is at the heart of the global economy, and many industrial stocks are well established and have a long track record of providing growth and income to investors,” says Justin Zaks, vice president of strategy at Moomoo Technologies, a trading platform vendor. “Companies including Illinois Tool Works, Emerson Electric, Dover, 3M, and Stanley Black & Decker have increased their annual dividend each year for more than 50 years in a row.” In addition, “many of these companies are integral to advances in automation, robotics, and electric vehicles,” Zaks adds. Take that, Silicon Valley.

Industries are systemically important in other ways, too. “Because of the close ties to the economy for so many subsets of the industry, you can get a pretty good read on what we’re seeing in the economy,” says Matt Steth, portfolio manager and director of equity research at Bartlett Wealth Management.

Industrial sector overview

A potential confounder about the industries investors need to consider is the wide range of areas they cover. Scott Sacknoff, president and index director at Spade Defense Index, a subsector index of industries used by the likes of investment giant Invesco for its A&D ETFs, sent a list of what technically counts as industries according to the Global Industry Classification Standard (GICS):

  • Capital Goods: Aerospace and Defense. Construction and engineering building products. electrical equipment; Industrial and machinery conglomerates (including industrial, agricultural, agricultural, construction and heavy trucks)
  • Commercial and professional services: printing; Environment and facilities. Office services and supplies. Support various security and alarm services. human resources and recruitment; research and consulting
  • Transportation: air freight and logistics; Airlines; Navy. Roads, railways and transport infrastructure

“Investors should narrow their definition so that they actually hold securities in the thematic area they are interested in,” says Sacknoff. “Each sub-sector under Industries can produce dramatically different returns. For example, business cycles for agricultural equipment and military aircraft rarely align. The Aerospace and Defense sub-sector tends to operate according to its own economic cycle. Commercial aircraft will benefit from economic expansion, global travel and trade while The defense cycle benefits when people feel insecure due to domestic or international stress events.”

In addition to the overall business cycle, “you may see more competition from non-US companies rather than from other industries,” says Stith. Clusters can be a problem with an overly spread focus, as a look at what happened to General Electric can attest. “This trend is probably reversing with the idea that investors are more interested in buying companies that are a little bit more focused.”

Industries can also become large enough and large enough to be distracting and dependent on end markets to lose their growth characteristics.

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Tips for investing in industrial stocks

There have been some significant changes in the industry listings and it is important to check the status of the various stocks. “A few years ago, ADP was an industrial company, and then it moved into technology,” says Stith, pointing to the company as an example. “Maybe they weren’t excited to go back to Industries” because they tend to have smaller valuation multiples than tech stocks.

If you’re going to buy an index fund through an exchange-traded fund, check the stocks it includes and their weightings so you don’t end up with something that’s an actual sub-sector if that’s not what you want to get.

As with any stock, check the financials to see how strong it is financially. Industries, especially mature ones, must have substantial funds and good management.

Look for profits, too. They can be plentiful, especially in large companies, and bring an extra return on your investment.

Risks of investing in industrial stocks

When the economy turns around and things slow down, you want a company that can work through the bad times to take advantage of when things are up again. A manufacturer of any age should have proven they can roll with the punches.

As you probably know, trying to time the market — jumping out and in again based on general conditions — is almost impossible. According to Your Investing Evolution Christopher Day, Founder of Days Global Advisors, says, “Within these economically driven secular cycles, there are opportunities for investors to generate additional value by offsetting the cyclical cycles of the value and growth segments.”

Another way is when things are down and prices are falling – assuming you don’t need to shell out cash for anticipated expenses like retirement or a college education in the next couple of years – consider an opportunity to add to your position at a lower cost. When things get better, you can sell the excess to balance your portfolio.

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Top industrial stocks to buy in 2023

No stock is right for every investor at all times, but here are some good options to consider. Remember to do your due diligence and determine your risk tolerance before making any investment.

automatic data processing (ADP)

ADP provides business services, including payroll, benefits administration, human resources, workforce management, and compliance. ADP provides payroll to more than 25 million (1 in 6) workers in the United States and more than 14 million worldwide. It has 1 million customers in 140 countries, serving businesses small and large.

This business is not as cyclical as some of the other names among the industrial sector because companies always have a need for human resources and employee payroll. ADP expects its market to grow by 5% to 6%. Revenue for the third quarter of fiscal year 2023 increased 9% to $4.9 billion year over year. Net earnings increased 12% and adjusted Ebit increased 14% over the same period. ADP has a yield of 2.3%.

FedEx (FDX)

The shipping and logistics company is “at the top of my list right now,” says Stith. “They’re deeply focused on taking a lot of the cost out of the business, driving the efficiencies that over time should make this company much more profitable than it has been in the past.”

One of FedEx’s weaknesses, Stith says, is having separate air, ground and truck networks, unlike UPS, where departments are “more integrated” and the company has higher operating margins. However, FedEx has made announcements about integrating its systems to reduce costs.

“They’ve also transitioned into CEO over the past year,” Stith added. The company changed the board of directors and brought in people from other groups. “FedEx is fairly inexpensive inventory, a great discount to UPS.” As margins grow and cash flow improves, “it will move closer to where it has traded historically.” FDX has a forward dividend yield of 2.2%

Honeywell International (HON)

“The company is now attractive given its strong growth prospects, diversified end markets, strong balance sheet and shareholder-friendly capital deployment strategy,” says Jim Brown, senior portfolio manager and research analyst at Buckingham Advisors. “Shares are trading at a lower price than average valuation than seen over the past two years.”

Honeywell’s long-term organic growth forecast is between 4% and 7% and it also has an acquisition growth strategy. “Honeywell has a history of both ups and downs, having beaten Bloomberg earnings consensus estimates for the 26th consecutive quarter,” Brown adds.

Four divisions — Aerospace, Performance Materials and Technologies, Safety and Productivity Solutions, and Honeywell Business Technologies — each provide between 17% and 33% of total revenue, driving diversification in operations. The company has $7 billion in cash overall with a “manageable” total debt to Ebita of 2.6.

“Over the past two years, stocks have traded at an average forward P/E of 22.3 times, yet they can now be bought for 20.7 times forward earnings,” he says. HON has a forward dividend yield of 2.1%.

Deere & Co (JD)

Stith finds that the company, known as John Deere, with its distinctive green and yellow color scheme on tractors deserves notice. “We feel John Deere is an exceptionally well-run company,” he says. It is global in diversity, but also sensitive to weather, crop impacts and crop prices, because farmers buy new equipment when they make money.

“We see the end markets continuing to be strong over the next couple of years,” he says. The past few years have been good for farm equipment. There is speculation that their market will soften a bit in the future, but Stith thinks there is at least another year or so of growth in the future.

“We like their focus on adding additional technology to some of the larger pieces of equipment,” he says, using precision technology to help farmers save money on seeds, fertilizer and fuel. Concern among investors about the immediate future in North America has caused stocks to trade at about 13.6 times earnings from the past 12 months, according to data from S&P Global Market Intelligence. The yield is around 1.8%, but they’re doing a good job of raising it and buying back [shares to boost prices]says Steth.

Mixed-price stocks are hiding in plain sight and offer great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, The 7 Best Stocks to Buy for the Second Half of 2023. Click here to download it now.