As the overall economy faltered last year due to COVID restrictions, one sector that was especially hit hard was industrials. With negative economic growth, companies that produce capital goods used in construction and manufacturing suffered. The Industrial Select Sector SPDR ETF (XLI) fell a whopping 34.5% from February 12th, 2020 to March 16th, 2020.

While the sector (and the market) rebounded from the March lows, it only surged after pharmaceutical companies announced positive vaccine results in the fall. This caused the XLI to rally more than 25% during the 6 months of Q4 2020 and Q1 2021.

As the economy continues to improve, business spending will increase, which will drive the need for equipment, machinery, and supplies. This makes it a great time to invest in industrial stocks. However, not all stocks in the sector are great investments. Which is why I am suggesting five top stocks in the sector, including ABB Ltd. (ABB), Louisiana-Pacific Corp. (LPX), Corning Inc. (GLW), Emerson Electric Co. (EMR), and Caterpillar, Inc. (CAT).

But first, I’ll provide you an overview of the industrial sector.

About the Sector

The industrials sector includes stocks of companies that produce capital goods used in construction and manufacturing. These businesses make and sell machinery, equipment, and supplies. Companies in the industry perform based on the supply and demand for building construction in the commercial, industrial, and residential segments of the market. The demand for manufactured products also plays a role.

The sector is considered the backbone of the economy since it plays a central role in the manufacturing and distribution of capital goods such as products and machinery. Companies are also involved in providing construction and engineering services and commercial and professional services.

The sector is capital intensive as companies need to invest money to expand their operations. Because of this, industrial companies tend to borrow money to buy new capital equipment or build new manufacturing facilities.

History

Before the Industrial Revolution, most people in this country lived off the land in farming communities. Money was made through selling crops such as tobacco or products like lumbar. However, there were also skilled laborers earning a living as a blacksmith or even a baker. But everything changed in 1790 when Samuel Slater built the first industrial cotton mill in Rhode Island.

The mill sped up the process of cotton being spun into yarn—this a spark for the industrial revolution. Soon technology would change the way products were made and how people worked. Instead of working on a farm, many people soon became factory workers and moved to more urban areas. Eventually, the U.S. became the world’s industrial capital, creating vast wealth for industry leaders and investors.

Economics

Industrial stocks are highly sensitive to the fluctuations in the economy. When the economy contracts, industrial companies produce fewer goods and postpone any expansion plans. This is due to a lower demand for industrial goods and services. Industrial stock prices tend to falter during this time.

On the other hand, during an economic recovery, the sector performs well in the early phase of a business cycle. There is more demand for industrial products and services. So capital expenditures are likely to increase as the economy improves. The sector tends to outperform during these times.

Industries

The industrial sector is made up of several industries. Three of the main industries include machinery, manufacturing, and construction. The sector also includes electric equipment, transportation, and defense, and aerospace companies

Machinery

These companies manufacture and sell industrial machinery such as tractors, cranes, and bulldozers. Without these items, there would be no buildings, streets, and bridges.

Manufacturing

These companies provide basic materials that are used in the manufacturing of goods. Think of all the materials needed to create electronic devices such as televisions and microwaves.

Construction

These companies provide the basic materials used in construction. This includes items such as bricks, concrete, and wires. These are all needed to construct buildings and offices.

Electrical Equipment

These companies produce electrical components and equipment used in all types of products.

Aerospace and Defense

These companies manufacture civil or military aircraft and defense products. This includes weaponry and vehicles.

Transportation Infrastructure

These are companies that manage roads, tunnels, and marine ports. They are vital for the transportation of labor and products.

Industrial Stocks to Buy in 2021

ABB Ltd. (ABB)

ABB is a global supplier of electrical equipment and automation products. The company is the number-one or number-two supplier in all of its core markets and the number-two robotic arm supplier globally. In automation, it offers a full suite of products for both discrete and process automation and robotics.

Automation is considered the fastest growing area in the industrial space, and ABB is one of the best-positioned companies to benefit from industrial automation. The company has a strong base of robotics and automation customers that sets the company for success as the Industrial Internet of Things (IoT) takes root. Both its industrial and robotics controllers have a leading market share. The company’s electrification products should also aid growth.

ABB has an overall grade of A, which translates into a Strong Buy rating in our POWR Ratings system. The company also has a Growth Grade of B, which isn’t surprising as earnings are forecasted to rise 40.9% in the current quarter and 25.5% for the year. The stock also has a Momentum Grade of B as it has shown bullish momentum over the past year.

We also grade ABB based on Value, Stability, Sentiment, and Quality. You can find those grades here. ABB is also ranked #7 in the A-rated Industrial – Machinery industry. You can find other top stocks in that industry by clicking here. 

Louisiana-Pacific Corp. (LPX)

LPX is primarily an oriented strand board producer while offering engineered wood siding and engineered wood products used in home construction. In fact, the company is one of the largest producers of oriented strand board (OSB) wooden panels used to sheath the exterior of a house during construction.

The company has a 24% market share in North America for OSB wooden panels and a 15% market share in total structural panels. LPX sees higher demand due to favorable demographics, such as a tighter labor market, more mortgage availability, and increased home building activity. Strong pricing should also attract additional capacity. Plus, LPX is expected to see increased market share for its durable and low-cost SmartSlide product.

The company should also benefit from increased demand in South American for OSB. LPX has an overall grade of B or a Buy rating in our POWR Ratings service. It also has a Growth Grade of B due to a strong year of sales. Revenue is up 39.2% over the past year and is expected to rise 118.6% year over year in the current quarter. LPX also has a Quality Grade of A due to a healthy balance sheet. The company has a high current ratio of 3.4, which indicates it has enough liquidity to meet short-term obligations.

You can find out how LPX fares in Value, Momentum, Stability, and Sentiment by clicking here. LPX is ranked #29 in the A-rated Industrial – Buildings Machinery industry. You can find other top-ranked stocks in the industry here.

Corning Inc. (GLW)

GLW is a leader in materials science, specializing in the production of glass, ceramics, and optical fiber. The firm supplies its products for a wide range of applications, from flat-panel displays in televisions to gasoline particulate filters in automobiles to optical fiber for broadband access, with a leading share in many of its end markets.

The company has dominated the smartphone cover glass market and works with network carriers to supply fiber for 5G buildouts. GLW also benefits from its ceramic substrates and gasoline particulate filters in the automotive market. Plus, the company is dominating the thin display glass market for 65″ and 75″ TV screens. In addition, its Valor Glass is disrupting the market for pharmaceutical glass.

GLW has an overall grade of A and a Strong Buy rating in our POWR Ratings service. It also has a Growth Grade of B, which makes sense given its forecasted growth this year. Revenue is expected to rise 22.7% year over year for the current quarter, and earnings are expected to soar 108.3% over the same period. GLW has a Momentum Grade of B as well. The stock has gained 108.7% over the past year.

To see GLW’s grades in Value, Stability, Sentiment, and Quality, please visit this link. GWL is ranked #9 in the A-rated Industrial – Manufacturing industry. You can find other top stocks in the industry by clicking here.

Emerson Electric Co. (EMR)

EMR is a multi-industrial conglomerate that operates under two business platforms: Automation Solutions and Commercial and Residential Solutions. The automation solutions segment is known for its process manufacturing solutions, such as measurement instrumentation and valves and actuators. Its commercial and residential solutions include climate technologies, such as HVAC and refrigeration products and services. Its tools and home products include tools and compressors.

The company is a dominant force in process manufacturing. It holds either first or second market share in multiple product categories. EMR should benefit from fewer available experts than can address in-demand automation services and its installed base, which will allow the company to benefit from long-term higher-margin aftermarket revenue. For instance, the company should see higher growth in the Asia-Pacific region, where it has a large installed base.

EMR has an overall grade of B or a Buy Rating in our POWR Ratings system. It also has a Stability Grade of B, which means both its price returns and growth figures are stable. The company has a Quality Grade of B, which means it has a solid balance sheet. EMR increased its cash to $2.2 billion in the first quarter.

To access the rest of EMR’s grades (Growth, Value, Momentum, and Sentiment), click here. EMR is ranked #26 in the B-rated Industrial – Equipment industry. You can find other top-ranked stocks in this industry by clicking here.

Caterpillar, Inc. (CAT)

CAT is an iconic manufacturer of heavy equipment, power solutions, and locomotives. It is currently the world’s largest heavy equipment manufacturer, with over a 15% market share in 2020. The company is considered a bellwether of the economy as it serves so many industries, including infrastructure, construction, mining, oil & gas, and transportation.

That’s why the company has been benefiting from an improving economy. CAT saw better-than-expected end-user demand in the first quarter, which resulted in year-over-year growth in both earnings and revenues after four declining quarters. The pickup in industrial activity should drive revenue growth in upcoming quarters.

For instance, ongoing strength in North American residential activity should increase demand for the company’s construction equipment. CAT will also benefit from increased government spending in China on infrastructure and building activity. The company has an overall grade of B, translating into a Buy rating in the POWR Ratings system.

CAT has a Growth Grade of B, driven by forecasted year-over-year earnings growth of 129.1% for the current quarter. The company also has a Sentiment Grade of B, which means it is well-liked by the “Smart Crowd.” For the rest of CAT’s grades (Value, Momentum, Stability, and Quality), click here. CAT is ranked #37 in the A-rated Industrial-Machinery industry. For more top stocks in this industry, click here.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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