The Pros' Top 5 Industrial Stocks to Buy
The industrial sector is lagging badly this year, but anytime there's carnage, there is also opportunity, analysts say.
Industrials stocks have been slammed so far in 2020, and that has Wall Street's analysts pounding the table for select names in the beaten-down sector.
There's little wonder why. The sweeping coronavirus pandemic and related lockdowns have derailed economies around the globe. As a result, the highly cyclical industrials sector is off more than 12% year-to-date. That lags the broader market by a wide margin.
Of course, anywhere you find carnage, you'll find a few bargains, too. And analysts recently have targeted a few industrial stocks to buy for their apparent value and growth prospects.
To get a sense of where those discounts might lie, we surveyed the S&P 500 for industrial sector stocks with some of the strongest analyst ratings on Wall Street, according to S&P Capital IQ.
Here's how it works: S&P Capital IQ surveys analysts' stock calls and scores them on a five-point scale, where 1.0 equals a Strong Buy and 5.0 is a Strong Sell. Any score lower than 2.5 means that analysts, on average, rate the stock as a Buy. Scores of 1.5 and below mean the stock is a Strong Buy. Either way, the closer a stock's score gets to 1.0, the more bullish analysts are about its prospects.
After sorting through the S&P 500, we found buy-rated stocks across the industrial sector, from data analytics to defense contractors. Read on as we look at five of the top-rated industrial stocks to buy in these turbulent times.
Share prices, dividend yields, price targets, analysts' ratings and other data are courtesy of S&P Capital IQ as of July 15, unless otherwise noted. Stocks are listed by analysts' average recommendation from worst to best.
IHS Markit
- Market value: $31.0 billion
- Dividend yield: 0.9%
- Analysts' average recommendation: 1.80 (Buy)
Wall Street's analyst community is bullish on IHS Markit (INFO, $78.15), which provides a slew of information, data and analytics to the transportation, resources and shipping industries, to name just a few.
Shares in the data company have rebounded smartly since the March bottom to deliver a year-to-date gain of 2%. That compares favorably to the S&P 500, which is effectively flat so far in 2020. But even though INFO has rallied 69% since March 23, analysts say the stock is still a good buy.
"The stock trades at a 2021 price-to-earnings multiple of 23 times, well below the information services average of 29 times," write William Blair equity research analysts, who rate the stock at Outperform (equivalent of Buy). "We appreciate the defensive, diversified nature of IHS Markit's business model and see room for multiple expansion as the company returns to its long-term growth profile."
Stifel, which rates the stock at Buy, agrees that INFO stock is undervalued.
"We are upgrading the shares from Hold to Buy because the valuation discount between INFO shares and the comp group doesn't make sense given the company's prospects," Stifel's analysts wrote in a June note to clients.
Of the 20 pros covering the company tracked by S&P Capital IQ, 10 rate it at Strong Buy, four say Buy and six rate it at Hold, making it one of the top-rated industrial stocks to buy at the moment. Wall Street also is looking for average annual double-digit profit growth (11%) over the next three to five years.
Masco
- Market value: $13.6 billion
- Dividend yield: 1.1%
- Analysts' average recommendation: 1.76 (Buy)
Masco (MAS, $51.53) is another S&P 500 industrial stock with double-digit growth prospects. The company, which supplies plumping products and architectural products to homebuilders and home improvement retailers, is forecast to expand its profits by about 10% annually on average over the next three to five years.
Masco's better-than-average outlook has allowed shares to put up a year-to-date gain of more than 7%, and the Street says they have more room to run.
Although housing starts remain depressed amid the coronavirus pandemic, they are beginning to show signs of life, rising 4.3% from April to May. Even JPMorgan, which rates the stock at Neutral (equivalent of Hold), recently lifted its price target from $38.50 to $53.50 and hiked up profit estimates to reflect an improved demand backdrop.
Deutsche Bank, meanwhile, calls the stock a Buy, noting that the building products industry appears to have bottomed in April. A combination of low interest rates and accelerating growth expectations should fuel further share-price gains.
The majority of analysts covering MAS stock are in the bull camp, with 11 analysts rating it a Strong Buy and another four saying Buy. Six call Masco a Hold.
Northrop Grumman
- Market value: $50.1 billion
- Dividend yield: 2.0%
- Analysts' average recommendation: 1.75 (Buy)
While Wall Street isn't exactly raving about industrial stocks as a whole, it's largely bullish on the aerospace and defense industry. That's thanks to continued government support and a pick-up in parts of the private sector.
Northrop Grumman (NOC, $300.76), in particular, can benefit from the latter.
"There are some signs that the civil satellite market has started to thaw," writes Jefferies, which rates the stock at Buy. "NOC was recently selected by [satellite company] SES to build two Cband geostationary satellites. … The contracts come on top of a key award from NASA, which cements NOC's positioning within civil space."
Canaccord Genuity adds that Northrop Grumman has a growth driver in military drones.
"We remain generally positive on the near-term defense spending outlook and continue to see strong support for drones and autonomy in any budget environment," Canaccord says.
Of the 20 analysts covering NOC tracked by S&P Capital IQ, 11 call it a Strong Buy, four say Buy, four rate it at Hold and one says sell. Collectively, they believe the company will deliver 9.6% average annual earnings growth over the next three to five years.
The upside potential is high, too. At an average price target of $380.10, NOC has implied upside of more than 26% in the next 12 months or so.
L3Harris Technologies
- Market value: $36.0 billion
- Dividend yield: 2.1%
- Analysts' average recommendation: 1.53 (Buy)
Analysts are banging the drum for L3Harris Technologies (LHX, $166.83), a defense contractor that specializes in everything from tactical radios and avionics to surveillance systems. The company was formed by the 2019 merger of L3 Technologies and Harris Corporation, and that tie-up fuels much of the bullish sentiment.
"The creation of LHX through the merger of LLL/HRS has generated best-in-class fundamentals, upside potential from a rapidly growing book of new business, and a strong relative alignment," writes RBC Capital, which rates the stock at Outperform.
Analysts project a 50% increase in net income in 2021 to $10.97 a share. Looking three to five years out, the Street sees profits expanding by 15.6% annually on average. And an average price target of $235.37 gives LHX implied upside of about 41% in the next 12 months or so.
Eleven analysts tracked by S&P Capital IQ rate the industrial stock at Strong Buy, six say Buy and two call it a Hold.
Jacobs Engineering
- Market value: $10.6 billion
- Dividend yield: 1.0%
- Analysts' average recommendation: 1.44 (Strong Buy)
Construction and engineering firm Jacobs Engineering (J, $81.16) provides an astonishingly wide portfolio of services. To name just a few, the company has a hand in cybersecurity, data analytics, artificial intelligence, construction services for wind-tunnel and water design-build projects and, naturally, maintenance.
That diversity of services constitutes the company's "secret sauce," says Credit Suisse, which rates shares at Outperform.
"Jacobs' competitive advantage is threefold," CS writes. "1) A comprehensive service offering including consulting, design, construction and operations & maintenance which is unique versus the competition; 2) Jacobs covers the complete water cycle ... versus the competition's offering; 3) Jacobs uses technology including Digital Solutions and proprietary intellectual property. Not all competitors have the breadth of technological expertise across all spectrums of the water market like Jacobs."
And like many industrial stocks to buy, J is on sale. Analysts like the stock's forward-looking price-to-earnings ratio of 14 times next year's profit estimates. That's about 36% cheaper than the S&P 500, which fetches 22 times expected earnings.
Of the 16 analysts covering Jacobs Engineering tracked by S&P Capital IQ, 11 rate it at Strong Buy, three say Buy and two call it a Hold. Better still: Their average price target of $97.80 gives shares implied upside of more than 20% in the next year or so.
