The current state of the economy, coupled with higher interest rates, has caused some instability. As a result, it has become increasingly difficult to find attractive stocks, particularly in manufacturing industries. However, there is a reliable approach to identifying potential winners regardless of the economic situation: looking for stocks with rising earnings estimates. This method becomes even more appealing when these stocks are available at a favorable price.
We have undertaken this approach and focused on industrial stocks within the Russell 1000. Specifically, we sought out stocks with price-to-earnings ratios that were lower than those of the S&P 500, while also demonstrating increasing 2024 earnings estimates. From our extensive screening process, we were able to identify 33 companies that met these criteria. To ultimately narrow down the list, we took into consideration the preferences of Wall Street analysts.
As a result, fifteen of these industrial stocks stood out, with their Buy-rating ratios either matching or surpassing the average of approximately 55%.
In no particular order, the following stocks made the cut:
- Emerson Electric (EMR): A leading automation company.
- Flowserve (FLS): Renowned for its valve manufacturing.
- TopBuild (BLD): A trusted distributor of building products.
- FedEx (FDX): A prominent player in the industry.
- Parker Hannifin (PH) and ITT (ITT): Industrial component manufacturers.
- Ferguson (FERG): A reliable plumbing distributor.
- Deere (DE): Well-known in the agriculture sector.
- Textron (TXT): Exemplary in various machinery applications.
- nVent Electric (NVT) and Hubbell (HUBB): Esteemed suppliers of electrical components.
- United Rentals (URI): A leading machinery rental company.
- Pentair ( PNR ): Respected for its filter manufacturing.
- Jacobs Solutions (J): A reputable provider of engineering services.
- Vontier (VNT): Known for its gasoline pumps and transportation infrastructure.
This diverse group of stocks spans multiple industrial end markets, including nonresidential and residential construction, machinery, automotive, agriculture, and water, among others. Despite the challenges faced by the economy, these stocks present promising opportunities for investors seeking potential growth and value.
The Stocks Trading at a Discount
The stocks in focus are currently trading at approximately 14.5 times the estimated 2024 earnings. In comparison, the S&P 500 trades at a higher multiple of about 18.5 times. However, the stocks are not considered discounted due to poor performance. Over the past year, these stocks have shown an average increase of around 27%, whereas the S&P 500 has only grown by about 12%. Notably, only Emerson and Deere stocks have experienced a decline in value during this period.
Factors Influencing the Discount
One significant factor contributing to the discount is the contraction of the industrial economy. The Institute for Supply Management Purchasing Manager Index (PMI) has been consistently below 50 for the past 12 months. A PMI reading above 50 indicates sector growth, while a figure below 50 signifies contraction.
This extended period of contraction can be attributed to rising interest rates impacting demand and discouraging businesses from maintaining inventories. This economic climate has made investors apprehensive.
Potential for Growth
The fact that these 15 stocks have managed to outperform despite the challenging economic backdrop suggests that they may experience significant growth when the manufacturing economy rebounds. Analysts are more optimistic about the prospects of these stocks compared to other industrial stocks.
Over the last three months, there has been an average increase in 2024 earnings estimates of 3% for these stocks. Conversely, other industrial companies in the Russell 1000 have experienced an average cut of 4% in their estimates.
These companies are doing something right, which bodes well for investors. However, it is essential to note that passing the initial screening does not automatically mean these stocks are worth purchasing.
As always, conducting thorough research on individual companies, including analyzing their strategies, competitive positions, industries, and management teams, is crucial before making any investment decisions.
Note: Estimates and 3-month changes in earnings per share are based on available data.
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