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3 Industrial Stocks That Can Withstand Market Volatility -- Barrons.com 3 Industrial Stocks That Can Withstand Market Volatility -- Barrons.com Dow Jones By Al Root Barclays analyst Julian Mitchell came to a dour conclusion after reviewing second-quarter numbers for industrial stocks: the sector isn't all that attractive. Still, he sees several ideas to put money to work in the space. Here are three. "Too early to buy the sector," writes Mitchell in a Wednesday research report. That conclusion is despite the fact that industrial stocks have underperformed since global manufacturing activity peaked around the end of 2017. Industrial components of the S&P 500 have returned only about 1.4% a year on average since December 2017, more than 6 percentage points worse than the average annual return of the index over the same span. And the weak sector performance has trimmed industrial valuation multiples. Industrial stocks in the S&P 500 are now trading for about 14.7 times estimated 2020 earnings, compared with 16.2 times estimated forward-year earnings in December 2017. The S&P 500, by contrast, trades for about 15.6 times estimated 2020 earnings, only slightly lower than the 16 times valuation multiple from late 2017. That's not cheap enough, however, for Mitchell. "We think [the fourth quarter of 2019] may offer a more attractive entry point, as it is likely to be the second quarter of the downturn," he writes. That's when stocks find a bottom, according to the analyst. Still, there are things to buy today. In particular, Mitchell likes stocks with catalysts and great balance sheets. United Technologies (ticker: UTX) is breaking into three companies: one focused on aerospace, one on air conditioning, and another on elevators. Mitchell rates United Technologies stock at Overweight, the Barclays equivalent of a Buy rating, and has a $153 price target, about 21% higher than recent levels. The coming transactions will matter more to the stock in coming months than the state of the overall economy. Dover (DOV) is a diversified manufacturer with a catalyst Mitchell is waiting for. "The company has an investor meeting coming up [Sept. 10]," he writes. Mitchell expects more clarity from management on restructuring, the fuel-pump business as well as additional portfolio actions. Asset sales and business detail could boost the stock price after the meeting. Barron's noted that Dover raised its dividend earlier this month. He rates Dover stock at Buy with a $112 price target, 24% higher than recent levels. Finally, Honeywell International (HON) is another stock he likes. It "has exposure to some end-markets where the top-line outlook is deteriorating such as [refining and process industries], [chemical catalysts] and warehouse automation, but aerospace comprises almost 45% of earnings," writes Mitchell. And aerospace trends are still solid. Honeywell also has rock-solid financials. "Balance sheet optionality is among the highest in the sector," add the analyst. Debt-to-Ebitda (earnings before interest taxes, depreciation and amortization) is less than 1 times at Honeywell. The market average is closer to 2 times. That gives Honeywell the ability to buy assets or its own stock. Mitchell rates Honeywell at Buy, too, with a $187 price target, 13% higher than recent levels. The economic data are getting choppy. Finding stocks that can thrive in a downturn is tricky. Looking for stocks with opportunities for upside is a good idea for investors who want to stay fully invested in industrials. |
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