Industrial stocks could be the recovery story of the year in 2021
Hey Bow Tie Nation, Joseph Hogue here with the Let’s Talk Money channel and another video in our 2021 investing series covering all the best stocks to buy for those higher returns next year.
And Nation, today we’re covering five stocks from a sector of the economy that could be the turnaround story of the year!
Stocks in the industrials sector; so think machinery, construction, anything made in a factory, have been one of the worst performing of the year. The sector is up just 6.3% – the sixth worst return among the 11 sectors and well under a 10% return on the broader market.
But the economic rebound has turned this sector into a classic recovery story, gaining nearly 14% in the last three months and we could have a lot further to go on these stocks. Not only is this a great rebound story for 2021, as the economy recovers and these industrial stocks head higher, but these are some great dividend stocks as well and will put cash in your pocket while you wait for those returns.
In this video, I’ll show you why industrial stocks did so badly this year but why they could rebound further in 2021. I’ll share how I picked the best stocks in the group and then reveal those five stocks to buy right now.
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Why Industrial Stocks could Boom in 2021
Now I know you want to get to those five stocks to watch but I just want to do a quick rundown of the industrials sector and why I think this can be one of the best performers next year. I’m also going to show you how I picked these five stocks so you can do this with your own portfolio.
The industrials sector is highly cyclical, which means it follows the economy closely. When the economy closes down like it did earlier this year, the big buyers of machinery, tools and parts, they close down too. Nobody needs a skid loader if that construction project has been postponed.
New orders for manufacturing weren’t that great in 2019 to begin with and then just plunged in March and April of this year. But that cyclical nature means, when the bounce happens, it’s like a rubber band ready to snap back.
What to Look for in Rebound Stocks to Buy
Looking deeper into the stocks in the sector, I’m looking for specific catalysts for each company in the new year. What specifically, beyond just that bigger picture rebound, can take this stock higher.
I’m also looking for a healthy balance sheet, something I’m looking closely at for all my stocks right now. Nation, this year was a debt bonanza as companies borrowed more than $1.4 trillion in the first six months, almost as much as full year borrowing.
The bill comes due and over the next few years, it is going to be increasingly important that you follow the balance sheet on your stocks. Make sure they have enough cash to cover short-term expenses, make sure the company is earning enough to cover interest expense and it’s paying down that debt.
Beyond these two factors, I also tried pulling stocks from different industries within the sector for a little diversification in the theme.
5 Best Stocks to Buy Now for 2021
Our first pick here is KBR Inc, an engineering and construction company in several segments with a 1.4% dividend yield.
And while KBR is in six segments including systems engineering, logistics and tech, it’s two here that I think are really going to drive growth in the future.
The defense modernization segment is growing at a 10% annual pace and has a project backlog of $2.1 billion and the Space and Mission Solutions segment is growing revenue by 13% a year with a $2.3 billion backlog.
In all, the company has booked almost $16 billion in back orders. That’s more than two and a half years’ worth of sales so the revenue picture for this one is excellent.
Through acquisitions, KBR has been positioning itself for greater emphasis on government solutions and while that acquisition strategy usually plagues a company with debt, leverage is at the low-end of management’s target and not a problem. The company reports $949 million in balance sheet cash, and remember that’s on a fairly small $4 billion company, so almost a quarter of the market cap in cash. Against just $1.57 billion in long-term debt, I would expect healthy annual increases in the dividend and more acquisitions to come.
The space race and higher government spending are really the catalysts here, not just in the near-term but further out for a good long-term buy and hold stock.
Trading for 16.8 times trailing and a history of growing earnings, I think KBR gets back to its $32 peak this year and keeps going from there.
Shares of Fedex, ticker FDX, are up 80% this year but have two catalysts to take them higher.
Fedex is the world’s largest global express shipping company and the demand picture is just amazing. I mean, most companies have to figure out a way to create demand for their product before they can expand operations but for Fedex, that demand is booming already.
eCommerce sales spiked 37% in the third quarter and hit 16% of total retail this year from just under 12% previously. The trend to shopping online has been boosting sales for Fedex for years but gave it supercharged growth this year and the momentum is just going to keep going.
Were it only for that ecommerce shipping, I might say the shares are expensive here but we’ve got another catalyst that isn’t fully baked into the shares yet.
With the Covid vaccines coming out, we’re about to have a very big distribution problem. Not only do we need to get those vaccines to 7.8 billion people, and Fedex is already ramping up for that, but the two earliest from Pfizer and Moderna need to be kept at very cold and very specific temperatures.
The problem is, for example, Pfizer is distributing its vaccine in special deep freeze boxes of 1,000 doses. Now those doses have to be kept at that temperature and used within a certain timeframe after opening the box but you’ve got a lot of rural towns that won’t be able to distribute all 1,000 doses.
So to avoid the waste, I think you going to see local governments using a lot of that express delivery to move these boxes around to where they need them.
The company beat Q3 earnings estimates by 81% and earnings are expected to jump 37% over the next four quarters to $15.51 per share. Between the long-term trend to ecommerce and the year-long boost from the vaccine, the share price can keep going.
Caterpillar, ticker CAT, is an iconic manufacturer of heavy equipment in mining, transportation and construction with a 2.3% dividend.
Like a lot of these industrial names, the last couple of quarters were brutal on Cat with a 23% slide in third quarter sales but one of the bright spots here is that the company is rationalizing some of that with cost cuts, so when sales do return, and they should very soon, earnings growth will jump.
Infrastructure spending is the only bipartisan issue right now and we’ve been trying to get one for years but there’s reason to believe we could see something in 2021. Beyond that potential catalyst, materials prices and mining had a very good year which should mean strong orders for heavy machinery over at least the next year.
Caterpillar has over $9.3 billion in balance sheet cash which is enough to pay a full year’s operating expenses and have money left over…so no liquidity problems here. The $26 billion in long-term debt hasn’t increased over the last few quarters so Cat isn’t one of these companies putting on a mountain of debt to survive.
And one of the new features I really like on Stockcard is it will show you what kind of portfolio each stock fits with best; between buy-and-hold, dividends and speculation. Caterpillar is a classic dividend stock with 27 years of dividend increases and we can see here the growth rate over one- three- and five year periods, with a 15% dividend increase last year.
General Dynamics, ticker GD, is one of the largest defense contractors in the world and offers a 2.8% dividend yield.
About a quarter of the company’s revenue is from its Gulfstream business jet segment so that took a hit this year but the defense side benefits from an ultra-long contract cycle so revenue drips in here over decades.
Case in point, the company books more than $81.5 billion in backlog orders with $41 billion in the Marine systems alone. I mean, this company is building nuclear submarines, so yeah, that’s not a revenue stream that just goes away.
That backlog will help support the shares over the next year and management expects business jet demand to improve towards 2022. With the profitability gains the company has made this year, increasing the operating margin by 2.4% in the third quarter alone, that recovery in sales could lead to an even stronger rebound in earnings.
The average analyst target is for $183 per share which would give this one 20% upside beyond that dividend yield.
Forty-three billion dollar Roper Technologies, ticker ROP, is an odd one here but you can’t argue with its success.
The company acquires software companies in applications, networking, measurement and industrial process technologies. It buys the companies just as they’re ramping up their cash flow and basically just holds them in a portfolio. The cash flow from prior purchases is used to acquire more companies and the cycle repeats itself.
Third quarter earnings were impressive, especially given weakness in the sector, but Roper was able to grow revenue by 1% annually and largely maintained its profitability measures.
The business model works really well and Roper’s cost of capital is so low that I think it can pick up a lot of discounted acquisitions this year and next. The company was able to raise $2.7 billion in debt last quarter at a rate of just 1.3%…that’s less than the rate of inflation.
As a result of this cheap funding and acquisition strategy, it’s been able to grow free cash flow by 13% over the last year and produce a 618% return over the last decade.
Don't miss out on the recovery in industrial stocks for 2021. The sector has lagged this year but could be about to rebound on a strong economy. Look for stocks to buy with a catalyst for growth and healthy balance sheets.