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.
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5 Best Industrial Stocks to Buy in 2020
As with any other sector, stocks in the industrial sector are not created equally. Some 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 good names to kick-start your research.
1. Raytheon Technologies (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 is 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 aerospace and defense offers up a strong strategic advantage. While most companies in the industrial sector are 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.
Raytheon Technologies 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 aerospace industry as well as international sales of its defense technology.
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 aerospace and international markets, but also continues to return value to investors by repurchasing stock and paying hefty dividends.
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 aerospace sector, Raytheon Technologies’ stock is already one for the watchlist. Add in a nearly perfect balance sheet and aggressive dividend payments, and you’ve got a stock that’s hard to ignore.
2. Waste Management (WM)
No matter where in the U.S. you live, you’re likely aware of the name Waste Management. You see the company’s big, green trash collection trucks driving through residential and commercial roads around the country getting rid of the waste that nobody wants lying around.
The company is one of the leading waste management enterprise in North America, and trash collection isn’t its only business. Apart from the general trash collection, disposal, and recycling services the company offers, Waste Management is also doing its part to assist in the push for a green environment.
Instead of dropping all of the trash collected into a landfill and letting it sit, Waste Management is one of the world’s leading operators of landfill gas-to-energy facilities. Many of the company’s familiar big green trucks that you see running around actually run on the gases expelled and collected from landfills, helping to reduce the company’s carbon footprint and providing consumers with another reason to work with the leader in waste management.
This landfill gas fuels more than the company’s equipment. An important part of Waste Management’s revenue comes from selling the electricity that it produces from the processing of these gases.
Like Raytheon Technologies, Waste Management has a relatively recession-proof business model. Regardless of economic conditions, leaving trash lying around in your house or yard is unhealthy. So, even in the face of an economic downturn, the vast majority of Waste Management’s customers — be they residential, commercial, or municipal — will continue to pay for trash collection and disposal services.
Lately, Waste Management has made some hefty investments with three key goals:
- Fleet Conversion. Waste Management is working to convert more of its fleet of trash collection trucks to run on cleaner natural gas. While this move comes with a relatively high initial expense, natural gas is less expensive than gasoline or diesel fuel. So, the move will save the company in operational costs in the long run.
- Automation. Waste Management also has plans to automate its fleet of garbage collection trucks, and is spending millions of dollars to do so. Again, this move comes with a pretty hefty price tag, but the long-run cost savings and benefits of automating the trash collection and disposal process will more than pay for the expense.
- Waste-to-Energy Efforts. Although Waste Management is already one of the global leaders in the waste-to-energy space, the company continues to innovate, increasing the amount, efficiency, and availability of its technology and developed energy.
Again, all of this is expensive, but as one of the world’s largest companies in the garbage collection, disposal, recycling, and waste-to-energy space, Waste Management has the money to spend. Even after all of its recent spending, the company has a stellar balance sheet and a reputation for generating plenty of free cash. With all that free cash, value is often returned to investors by way of share repurchases and compelling dividends, all of which makes Waste Management stock one for the watchlist.
3. 3M (MMM)
3M is one of the most diversified companies in the industrial space. 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, 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 growth and free cash flow, even through tough economic times.
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. 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 has a strong history of completing accretive acquisitions.
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. United Rentals (URI)
While the COVID-19 pandemic has wreaked havoc on several sectors, the building and construction industry is booming. The first industrial companies you may think to look at are big industrial machinery companies like Caterpillar (CAT). Unfortunately, even with the state of construction, these plays are tough to make money on at the moment.
Caterpillar reported a 21% decline in sales and 39% decline in earnings per share in the first quarter of 2020. The company also pulled back its guidance substantially and has slowed additions to its inventory.
With the world’s largest player in the construction and mining equipment space having such a hard time, it and companies like it don’t look great right now. However, there is one industrial company that seems to be benefiting greatly from the construction boom — that’s United Rentals.
United Rentals is the world’s largest heavy equipment rental company, and is in the perfect position to take advantage of the COVID-19-related boom in construction.
With the COVID-19 pandemic fresh in mind, and resulting economic pain that many are expecting, some of the world’s largest construction companies are hitting the brakes when it comes to purchasing new heavy equipment. Instead, these companies are opting to rent the equipment they need to complete projects, and waiting to see what happens with future projects before buying expensive new equipment.
At the same time, United Rentals shares are trading at a bit of a discount. The company recently suspended its share repurchase program and withdrew its 2020 guidance. Upset investors sent the stock tumbling, but the sell-off may have been overblown.
Even considering the worst-case scenario, United Rentals said that it expects to remain substantially free-cash-flow positive. Considering the strong growth in equipment rentals with the COVID-19 pandemic in the backdrop, there’s little question that the company will be able to keep this promise.
Considering the discount offered through recent declines, the company’s leadership position in equipment rentals, and the change in tides in the heavy equipment subsector, United Rentals is poised to make a compelling comeback.
5. IDEX (IEX)
Last on this list but definitely not least, IDEX is a massive industrial player. Founded in 1988, IDEX is a relatively young player in the U.S. industrials sector, but don’t let that fool you. The company is a conglomerate that includes more than 40 businesses with operations across 20 countries.
IDEX operates across several areas of the industrial sector, including aerospace, energy, safety, and others. If you or a loved one has ever been saved by the Hurst Jaws of Life after a car accident, you have IDEX to thank for developing and manufacturing that technology.
Throughout the COVID-19 pandemic, IDEX has seen pretty stellar performance compared to the rest of the sector, and it’s poised to continue more of the same. While others in the sector are guiding for declining sales, IDEX management has set expectations to generate about 2% organic sales growth in the second half of the year.
The company has a strong track record of earnings and good margins and has historically outperformed many of its peers in the market. The company is also known for its appreciation of its investors, as can be seen through the payment of strong dividends. Although the COVID-19 pandemic has slightly impacted expected dividends for 2020, this year is the first time since 2007 that IDEX has seen a reduction of dividends from the prior year.
Even through the pandemic, IDEX is expected to maintain compelling free cash flow and continue to maintain a solid balance sheet. Considering this, it’s better-than-average performance in the market, and the company’s continued growth expectations, IDEX stock is one for the books.
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 sector, it’s best to look for investment opportunities that are not highly dependent on economic conditions for growth. A trend among all of the companies listed here is that they are all known to perform well regardless of economic conditions, which is often a major risk associated with the industrial sector.
Do you invest in industrial stocks? What are your favorite stocks in the industrial sector?
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.