The industrial sector helped to build the United States as we know it today. It all started in the late 1700s when Samuel Slater opened the first industrial mill in Pawtucket, Rhode Island. However, there’s a bit of a dark history surrounding this mill.
Many argue that the cotton mill Slater launched was the result of a design that was stolen from a British model, making the industry one that was built on intellectual property theft. Nonetheless, industrial textiles would drive the beginning of the United States’ industrial revolution.
Today, the American industrial sector produces far more than textiles. The majority of U.S. industry is centered around the distribution of machinery, equipment, and supplies used in the manufacturing, construction, and defense sectors.
Everything from raw materials, like iron, to safety products, machined components, and logistics solutions fall into the industrial category.
5 Best Industrial Stocks to Buy in 2021
As with any other sector, all industrial stocks are not created equal. Some industrial stocks have a strong track record of solid performance, while others don’t. As such, picking the right stocks when investing in the space is extremely important. Here are five of the top industrial stocks to watch.
1. Raytheon Technologies (NYSE: RTX)
Raytheon Technologies was recently founded, coming to life in April of 2020 as the result of a merger. However, its component companies have a long history in the industrial sector.
The two companies that merged to create Raytheon Technologies were Raytheon Company and United Technologies, founded in 1922 and 1934, respectively. Between the two, there are almost two centuries of dominance in the industrial sector.
The combined company works across several subsectors of industry. Its main focus is aerospace and defense, with the company specializing in missile defense, cybersecurity, electronic warfare, and precision weapons.
This core focus on aeronautics and defense offers up a strong strategic advantage. While most companies in the industrial space are cyclical, or at the mercy of economic conditions, Raytheon Technologies is shielded from economic hardship. The vast majority of the company’s business comes from the U.S. government, which provides a steady stream of revenue for the company regardless of economic conditions.
Nonetheless, this can sometimes prove to be a negative. Because Raytheon is a defense contractor, the company is dependent on the defense budget and heavily exposed to the political risks associated with it.
The company is currently working to solve this problem. In order to reduce its exposure to the risk of U.S. defense budget tightening, the company is increasing its focus on diversification into the aeronautics industry as well as international sales of its defense technology.
In fact, the company even pushed into the personal protective equipment market during the coronavirus pandemic.
As you could imagine, these types of moves cost quite a bit of cash. Raytheon has an incredibly strong balance sheet, featuring plenty of cash to foot the bill. The balance sheet at the company is so strong that it not only has the cash to expand into high value industries and international markets, but also continues to return value to investors by repurchasing stock and paying hefty dividends.
At the moment, Raytheon’s dividend yield sits at 2.37%, making it a great option for those looking for both industrial and dividend stocks.
While the stock was a victim of the COVID-19 pandemic, investors are quickly beginning to realize that the stock price declines actually created a discounted opportunity to get in on future gains. As a result, Raytheon has seen strong valuation growth year-to-date, climbing from around $68 per share to around $75 per share.
With a strong history of service to the U.S. defense sector, increasing uptake of the company’s products on the international stage, and innovation in the aeronautics sector, Raytheon Technologies’ stock is already one for the watchlist. Add in a nearly perfect balance sheet, aggressive dividend payments, and valuations that are far lower than they should be, and you’ve got a stock that’s hard to ignore.
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2. General Electric (NYSE: GE)
The beginning of 2020 was painful for General Electric. Unfortunately, as the coronavirus took hold, industrial stocks across the board took a beating. However, GE began making a strong recovery toward the end of the year and into early 2021.
The company’s products play a big role in Boeing (BA) jet engines and gas turbines. Unfortunately, with the dangers of contracting COVID-19 in mind, the travel industry came to a standstill, with few passengers willing to fly. That is beginning to change as vaccines make their way into arms and consumers become more willing to venture away from home.
The good news is that even through the global health crisis, GE had something going for it: the company’s health care arm became increasingly active.
GE has already benefited from declining COVID-19 numbers, and this trend is expected to continue. Many analysts suggest the company will make a return to profitability in early 2021. Analysts project the company to produce earnings of $0.04 per share in the current quarter, with EPS making a steady climb to $0.26 for the full year this year and $0.52 next year. That’s a far cry from the adjusted EPS of $0.01 produced last year, with the majority of quarters in the negative.
Nonetheless, it is important to consider the risks. Wall Street experts point to the company’s aviation portfolio as the strongest part of its business. This portion of the business will not make a full recovery until consumers feel safe flying again, which could take some time, even as COVID-19 case counts decline.
Moreover, American Airlines recently cancelled hundreds of flights as a result of staffing issues. These types of concerns further increase the risks involved in investing in anything having to do with the airline industry.
On the other hand, General Electric is a longstanding company that has been through its fair share of hard times. While the trouble in the airline industry does pose some concerns, the company is executing well as it navigates through the headwinds, resulting in expectations of strong growth ahead.
All in all, if you’re looking for a potentially high-growth stock as the economy continues to recover from COVID-19 and you would like to invest in industrials, General Electric is one that’s well worth considering.
3. 3M (NYSE: MMM)
3M is one of the most diversified industrial companies in the world. In fact, industrial is only one of the four major sectors in which the company operates; 3M is also a major player in the transportation and electronics, technology, health care, and consumer goods sectors.
As a result of this diversification, 3M currently delivers thousands of different products to consumers, corporations, and municipalities alike, and its innovation isn’t likely to come to an end anytime soon. In fact, throughout the company’s history, it has put around 30% of its free cash flow and borrowing power back into research and development.
As a result of this capital allocation strategy, the company has done a great job of keeping its competitors at bay. This has allowed 3M to consistently deliver solid revenue and earnings growth and free cash flow, even through tough economic times. Perhaps that’s why 3M stock has seen one of the strongest recoveries among industrial stocks since the start of the COVID-19 pandemic, gaining more than 55% since mid-crisis lows.
The company also greatly values its investors. Throughout its history, it has consistently provided 30% of its free cash as a return of value to investors through growing dividends. In fact, 3M has increased its dividend payout every year for more than 50 years, and there’s no sign of slowing on that front. The stock has traded with an average dividend yield of 2.82% over the past five years according to YCharts, with the current yield sitting at 3.03%.
Moreover, the company is known for repurchasing shares, further returning value to its shareholders.
With the cash that’s not used for dividend payments and research and development, 3M tends to complete accretive acquisitions, adding to the underlying value a share of the company’s stock holds.
Considering the continued innovation at 3M, the company’s dedication to its investors, and a fortress of a balance sheet, 3M is a stock that’s well worth your attention.
4. Lockheed Martin (NYSE: LMT)
Lockheed Martin is another industrial stock that experienced serious declines as a result of COVID-19. The company’s core focus is within the aerospace and defense subsectors of the industrial sector. The company has a long history of serving the United States military with advanced technology systems designed to give the U.S. a competitive edge.
Relying extensively on contracts with the military can be risky business because budgetary restraints may hinder growth. Lockheed Martin hedges its bets on business with the U.S. government by also serving some of the biggest companies in the aeronautics industry. The company provides key technological components found in many aircraft today, and continues to research and innovate in order to maintain its top-dog position.
While the company’s steady stream of cash from the U.S. government has served it well during the COVID-19 pandemic, it’s activities in the aeronautics industry slowed with the vast majority of consumers being afraid to travel prior to the flood of vaccines that are currently hitting the market.
Nonetheless, Lockheed Martin is an industrial stock that represents yet another COVID-19 bounce-back opportunity. As consumers begin to venture out of their homes and into the wild again, demand for the company’s products and services in the aerospace sector will likely recover, leading to a strong rebound in the price of the stock.
Even through the COVID-19 pandemic, the company’s financial resilience has been clear. The company has even continued to pay dividends to investors and plans to keep doing so. The stock has traded with a dividend yield averaging 2.51% over the past five years, according to YCharts. With such a strong dividend yield, even with coronavirus weakness in mind, Lockheed Martin makes a strong income investment.
Adding to the opportunity here is the fact that, although many industrial stocks have made a strong comeback since the coronavirus set in, Lockheed Martin isn’t one of them. Sure, the stock has seen some growth from mid-crisis lows, but compared to its peers, there’s a clear argument that the stock is still highly undervalued compared to its peers, making it a strong play for the value investor.
With the financial backing associated with the work the company does in the defense sector, a strong history of dividend payments, displays of financial resilience in tough economic times, and what appears to be a heavy discount on the stock, Lockheed Martin is one of the top industrial plays on the stock market today.
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5. Honeywell (NYSE: HON)
Honeywell is another industrial stock that took a major hit as a result of COVID-19. However, unlike Lockheed Martin, Honeywell has made a strong recovery, now trading well above the bargain levels it was trading at when fear of the virus took hold of the market. Since its mid-crisis lows, the stock has grown more than 90% as of June 2021.
As one of the largest industrial companies in the world, Honeywell has its fingers dug deep into the Internet of Things (IoT), aerospace, cybersecurity, and several other corners of the sector.
The company’s aerospace division is touted by Wall Street experts as the most important segment of Honeywell. The company’s technology is a common component in all areas of aircraft, including commercial, defense, and space travel.
Due to COVID-19, far fewer consumers were willing to travel until recently, throwing a stick into the spokes of the aerospace industry. So, while the company has made a strong recovery to date, there is still plenty of room for growth as consumers begin to travel again.
Nonetheless, throughout the pandemic, the company’s fundamentals have remained strong. In fact, with a strong balance sheet, the company continued paying dividends to its investors, even in the depths of the crisis. Today, the dividend yield is 1.75%, which is even more impressive when you consider the strong growth the stock has experienced over the past year.
Honeywell is a massive company that got where it is as a result of tremendous innovation, great management, and a respect and appreciation for its investors. Although the stock has already made a strong recovery from pandemic-related lows, there’s still plenty of room for growth as the aerospace industry has yet to come back to life.
Consider Buying Industrial ETFs
Investing in individual stocks can be rewarding, but can also be a daunting task. The most successful investments are generally the result of detailed research that takes quite a bit of time.
However, there is one way you can gain access to industrial stocks without having to devote so much time to research. Simply invest in industrial-focused exchange-traded funds (ETFs). Industrial-focused ETFs are a great option for a novice investor or if you simply don’t have the time to do adequate research on multiple individual industrial stocks.
Keep in mind that ETF investing isn’t research-free investing. It’s still important to look into a fund’s historic performance, expense ratio, and holdings before diving in.
The industrial sector helped to strengthen the U.S. economy early on and continues to do so today. At the same time, the growth in the sector has led to incredible investment opportunities over time.
However, if you’re going to invest in the industrial sector, it’s important to keep in mind that the sector is cyclical in nature. Investing in stocks that also have offerings in other sectors or manufacture products for the government can help reduce the risks associated with these cyclical plays.
As industrial companies continue to make strong recoveries, compelling opportunities in the space are beginning to emerge. With vaccines and treatments becoming available and the pandemic becoming a thing of the past, the recovery in the industrial sector as a whole will likely be impressive, suggesting that now is the time to consider opportunities in the space.
Disclosure: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.