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12 Best Industrial Stocks to Buy Now

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Ma’k Almario
·12 min read
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In this article, you will find the 12 best industrial stocks to buy now. Click to skip ahead and jump to the 5 Best Industrial Stocks to Buy Now.

Based on a definition by Economy Watch, the “Industrial sector or secondary sector is one of the 3 sectors that make up a country's economy. The other two are the primary sector (includes agriculture, fishing, and mining) and the service sector (includes hospitality, consultancy, and nursing). The secondary sector is one that makes a complete product that can then be utilized. Examples of the industrial sector are manufacturing industry and construction.” (See 15 Biggest Manufacturing Companies in the World and 10 Best Construction Materials Stocks to Buy Now) Basically, the industrial sector is the backbone of the economy, it is the sector in charge of transforming unprocessed material to its end result.

The industrial sector was greatly affected by the COVID-19 pandemic, enforced lockdowns, and social distancing have led to industrial stoppages, and end process disruptions. In a study by Statista, in August 2020, the global industrial production shrank by 3.94 percent compared to the same period of 2019, this data however does not include the United States. In a separate article by Trading Economics, “industrial production in the United States decreased 3.60 percent year-on-year in December of 2020.”

12 Best Industrial Stocks to Buy Now
12 Best Industrial Stocks to Buy Now

The slowdown is not surprising as the majority of industrial companies need on-site workers and the demand for industrial projects decreased due to the pandemic. A recent survey from the National Association of Manufacturers showed that 53% expect COVID-19 to impact their operations. However, the industrial sector is viable for growth in any industry and has always been an important part of the economy, proving that the decline in the industry is only temporary. In an article published by AP News, in November, the United States industrial production increased 0.4%. However, the industrial output is still 5% below its prior-pandemic level.

The industrial sector is strongly correlated with the economy's performance. When the economy is growing, the manufacturing industry thrives. However, when the economy declines, the industry tends to perform worse. With the Biden Administration’s “Build Back Better” plan, the president plans to build a stronger industrial base. In a report published on whitehouse.gov, “The U.S. Government will not only secure supplies for fighting the COVID-19 pandemic but also build toward a future, flexible supply chain and expand an American manufacturing capability where the United States is not dependent on other countries in a crisis. To this end, A Sustainable Public Health Supply Chain directs the development of a new Pandemic Supply Chain Resilience Strategy.”

In order to identify the 12 Best Industrial Stocks to Buy Now, we started with the 45 holdings from the PRN – Invesco DWA Industrials Momentum ETF - and we were able to narrow down our list to 12 stocks by using the hedge fund sentiment scores.

Our in-house research showed that by using the hedge fund sentiment data, we can identify a small group of stocks that can outperform the S&P 500 index on average by double digits annually. For instance, the portfolio for stock picks for our monthly newsletter has beaten the market by over 88 percentage points since March 2017 (see details here). Some of the portfolio choices for our monthly newsletter were also publicly shared on our website. In October, we posted this real estate stock idea and since then it’s been up more than 50 percent.

Based on our hedge fund sentiment data, we present to you the 12 best industrial stocks to buy now among 800+ hedge funds tracked by Insider Monkey:

12. Builders FirstSource Inc (NASDAQ:BLDR)

No of HFs: 38

Total Value of HF Holdings: $616 Million

We start our list of the best industrial stocks to buy now with BLDR. The top hedge fund holder of this stock is Robert Joseph Caruso’s Select Equity which had $178 million invested in the stock at the end of September. Anabatic Fund mentioned the stock in its Q4 2020 investor letter:

“Builders FirstSource (BLDR) was one of the few bright spots in our 2020 results. BLDR shares appreciated by 60.6% as housing boomed and market sentiment turned bullish, but as usual, the ride was uneven. The share price approached $28 in late February…and then fell more than 65% over the next few weeks. From that spring low the shares more than quadrupled to close the year above $40 per share.

The company performed well despite very difficult operating circumstances. Demand whipsawed from strong to almost zero to booming in a matter of a few months. Gyrating commodity prices, constraints on labor, and stark regional disparities added to the complications. Solid financial results and plenty of cash flow also enabled the company to continue paying down debt.

With the acquisition of ProBuild in the rearview mirror and the balance sheet in good shape, BLDR announced in late August the all-stock acquisition of BMC Stock Holdings (BMCH). The two companies had been talking about a deal before the pandemic, and as the industry dynamics came into focus over the summer they decided to finalize a deal (which closed on January 4, 2021). The merger also solves the succession issue created by the pre-pandemic announcement that Chad Crowe, BLDR’s CEO and longtime executive, planned to retire. BMCH CEO Dave Flitman will take over as CEO of the combined company on April 1st .

BLDR was already the second-largest distributor in a fragmented industry, and the combined company will be almost as large as leader ABC Supply. As the industry recovers it is reasonable to expect further consolidation, and the savings and benefits from scale are real. It is also reasonable to expect some bumps in the road as the BMCH acquisition is integrated, just as BLDR experienced in the integration of its acquisition of ProBuild just a few years ago.

Unlike the leveraged acquisition of ProBuild, which left Builders’ balance sheet loaded with debt, the BMCH deal is all stock. Despite a pre-deal market capitalization of $3.3 billion for BLDR and $2.2 billion for BMCH, BLDR shareholders will own just 57% of the combined company and it’s not clear they got as much as they gave in this deal.

We sold a significant portion of our BLDR shares in the second half of 2020 as the price skyrocketed. We entered January with a small remaining position that may be sold this year. Unlike Armstrong, which has been a bigger investment and one that has seen very little buying or selling over the past five years, we’ve been more active with BLDR given the much larger price fluctuations. Our initial purchases were made in 2016, and some significant adjustments were made in late 2017 / early 2018 and again in late 2018 / early 2019. The shares sold in late 2020 had roughly tripled from their purchase price.

The company’s valuation today is discounting much of the potential upside in coming years but not much of the risk. Valuation is never the sole factor in a sell decision, and in this case the decision was a mix of market optimism, concerns about the pending integration of BMCH, the leadership succession, and tax implications.25 I also plan to follow the company closely, given its attractive attributes and history of performance. At a favorable price I would be glad to be a shareholder again.”

11. Cintas Corporation (NASDAQ:CTAS)

No of HFs: 38

Total Value of HF Holdings: $741 Million

CTAS is known for its services to businesses. At the end of September, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock. In Diamond Hill Capital’s Q1 2020 investor letter they mentioned a few of their comments on the stock.

“Cintas Corp. provides U.S. businesses with uniform rental services and restroom cleaning, first aid, safety and fire protection goods and services. We re-initiated a short position in Cintas as we believe the stock price does not reflect the likelihood its results will be hard hit by increases in unemployment caused by the COVID-19 pandemic.”

10. Illinois Tool Works, Inc. (NYSE:ITW)

No of HFs: 39

Total Value of HF Holdings: $565 Million

ITW raks 10th on our list of the best industrial stocks to buy. The top hedge fund holder of this stock is Cliff Asness’ AQR Capital Management which had $156 million invested in the stock at the end of September. An insider recently purchased 1,575 shares at around $159 in May 2020. The stock is up 22% since then. Should value investors buy ITW stock? Amana Mutal Funds mentioned that stock is equally diverse in its Q4 2019 investor letter:

“Illinois Tool Works is equally diverse and a company with a track record of strong management consistently driving revenue and earnings higher.”

9. Honeywell International, Inc. (NYSE:HON)

No of HFs: 41

Total Value of HF Holdings: $970 Million

HON is the 9th best industrial stock to buy now. They were mentioned as one of the 10 Best Defense Stocks to Buy for 2021. Madison Investments talked about the stock in its Q3 2020 investor letter:

“This quarter we are highlighting Honeywell (HON) as a relative yield example within Industrials. HON is a leading industrial conglomerate with an increasing focus on software and automation. We believe its global scale, history of innovation and strong culture focused on continuous operational efficiency create a sustainable competitive advantage. HON operates four segments including Aerospace, Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. These businesses serve diverse end markets including aerospace, U.S. defense contractors, e-commerce and oil and gas customers.

Our thesis on HON is that it will successfully leverage its software technology across its huge installed base of customers and products. Its installed base includes approximately 36,000 auxiliary power units, 25,000 engines, 20,000 wheels and brakes, 20,000 flight management systems and 10,000 units of communication hardware. Importantly, HON software technology is integrated into mission-critical operations of its customers including cockpit control in aircraft flights, warehouse automation in manufacturing and connected solutions in commercial buildings. We believe its technology advantage is due to above-average spending on research and development (R&D). For example, in key aerospace businesses, HON spends 4.5% of sales on R&D compared to 2-3% spending by most competitors.

The fund purchased HON in the quarter after it reached a reasonable valuation with an attractive dividend yield and relative dividend yield versus the S&P 500. At the purchase price in the upper $160s, the stock traded for less than 20x estimated earnings expected over the forward 12 months. We believe this valuation can grow over time if HON continues to innovate and create new products, while its underlying end markets like aerospace recover over time. It also has an A rated balance sheet (as rated by S&P), an absolute dividend yield of 2.2%, and an attractive relative yield of 1.3x versus the S&P 500, which is the highest relative yield since 2012, as shown below. The company also has a history of dividend increases as it has grown dividends per share by 12.5% per year on average over the last five years.

Risks to the thesis include a prolonged economic downturn that results in sustainable declines in its key end markets like aerospace. We estimate about 40-45% of sales are exposed to these end markets. Other risks include lost market share if customers don’t like its evolving software offerings, and the risk the company makes a value-destroying acquisition. We think this last risk is relatively low as HON has a history of successful acquisitions.”

8. Deere & Co. (NYSE:DE)

No of HFs: 42

Total Value of HF Holdings: $1.308 Billion

DE ranks 8th on our list of the best industrial stock to buy now. They were mentioned as one of the Top 10 Agriculture Stocks to Buy Now. First Eagle Investment Management mentioned DE in a recent investor letter:

“Deere & Company manufactures and distributes equipment used in agriculture, construction, forestry and turf care in more than 30 countries. The company executed well in what has been a supportive environment for its products marked by strong pricing in agricultural commodities and robust crop yields. Notably, Deere successfully rolled out price increases in its Agriculture & Turf division, which improved its operating margins.”

7. HEICO Corp. (NYSE:HEI)

No of HFs: 43

Total Value of HF Holdings: $712 Million

At the end of September, a total of 43 of the hedge funds tracked by Insider Monkey held long positions in this stock. The top hedge fund holder of this stock is Robert Joseph Caruso’s Select Equity Group which had $88 million invested in the stock at the end of September. An insider purchased 1,054 shares at around $118 in January 2021. The stock is down .8% since then. On January 21, HEI director Alan Schriesheim sold 3,000 shares of the firm’s stock. In an article published by MarketBeat “the stock was sold at an average price of $115.90, for a total transaction of $347,700.00. Following the transaction, the director now directly owns 37,822 shares of the company's stock, valued at $4,383,569.80.”

6. Rockwell Automation, Inc. (NYSE:ROK)

No of HFs: 44

Total Value of HF Holdings: $521 Million

ROK is the 6th best industrial stock to buy now. At the end of September, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock. Amana Mutual Funds talked about ROK in its Q4 2019 investor letter:

“As its name implies, Rockwell has significant exposure to industrial automation, an arena that should provide a steadily growing market over the coming years.”

Click to continue reading and see the 5 Best Industrial Stocks To Invest In.

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Disclosure: No positions. 12 Best Industrial Stocks To Invest In is originally published at Insider Monkey.