What are we looking for?
In 2018, the U.S. market was sharply divided between winning and losing sectors. Some sectors, such as technology, put on strong performances; others, such as energy, financials and industrials, were laggards. The industrial sector was particularly hard hit by trade concerns, which resulted in it delivering a negative 9.4-per-cent return for the year.
So far this year, the U.S. markets have rebounded strongly with the industrial sector leading the way; the sector is now up 16.1 per cent since Dec. 24. This growth is driven by increasing optimism of a new trade deal with China as well as recognition by investors that this sector had become a bargain after a poor 2018.
Despite the recent runup, are there still gems in the U.S. industrial sector worth exploring?
We will be using Trading Central Strategy Builder to search for large-cap U.S.-listed industrial stocks. We will focus on companies with market capitalization of more than US$15-billion to limit our results to the largest and most stable stocks in the market.
To select companies that appear to be well valued, we can choose only companies with trailing price-to-earnings ratios of 20 or less. Note that the average P/E ratio of companies in this sector is about 28.
To focus on companies with profitable businesses and a track record of growing earnings, we will also select only stocks with five-year earnings-per-share growth rates of 7 per cent or more (annualized).
Finally, to select stocks with strong upward price momentum, we will select only stocks whose prices have increased by 10 per cent or more year-to-date.
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What did we find?
Paccar Inc. is one of the largest manufacturers of medium and heavy-duty vehicles in the world under the Kenworth and Peterbilt brands. Paccar stock languished in 2018 under concerns about trade and a slowing worldwide economy. The stock drifted lower all year before hitting a 52-week low on Dec. 24. This year has been a different story as the stock has surged higher – up 19.7 per cent year-to-date. In spite of this jump in price, the stock still has a trailing P/E ratio of just 11.
Honeywell International Inc. is the largest company on our list with a market cap of more than US$112-billion. Honeywell stock collapsed in the fourth quarter of 2018, losing almost 22 per cent of its value in 10 weeks after warning that slowing Chinese demand was affecting sales. Honeywell stock is now up 17 per cent year-to-date on the back of a strong fourth-quarter earnings report in early February and improved company guidance for earnings growth in 2019.
Dublin-based Eaton Corp. PLC also makes our list with a five-year EPS growth rate of 15.9 per cent and a P/E ratio of 16.6. Eaton Corp. is a manufacturer of power management equipment for a variety of industries including electrical utilities, oil and gas mining, and others. Like many of the industrial stocks on our list, Eaton become oversold in December on the belief that global growth was slowing. A shift in sentiment in 2019 has led the stock price higher, now up 17.4 per cent year-to-date. Eaton also delivered fourth-quarter earnings in late January that handily beat analyst expectations, further accelerating its move higher.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Trading Central in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of customer success at Trading Central.