The industrial sector is inherently cyclical, which is why investors are so down on the sector right now. In fact, recessionary fears are a big part of what's driving the current bear market. But, if you think long term, a lot of industrial companies look like they could be good additions today. Some companies to look at are Stanley Black & Decker (SWK -0.01%), Rockwell Automation (ROK -1.85%), and Honeywell International (HON 0.38%). Here's a quick look at each of them and why they could be worth additions yo one's portfolio.
1. Fast and furious
Stanley Black & Decker's stock is off by a massive 60% or so in 2022. That's not actually so surprising; management has cut its full-year earnings projections by more than half since the start of the year. That's not good, with the tool maker suffering from falling sales, supply chain issues, and rising costs thanks to inflation.
Stanley Black & Decker has material exposure to retail customers. This group of buyers tends to pull back more quickly than business customers during hard times. That's exactly what management has been seeing of late, with tool sales to professionals still holding up pretty well. The retail side of the business, however, makes the company heavy on what is called the short cycle in the industrial space. When the economy eventually recovers, Stanley Black & Decker is likely to see business rebound more quickly than many of its industrial peers as consumers head out to the stores again. Meanwhile, management isn't sitting still but looking to cut costs and streamline operations.
Investors willing to look past the current headwinds can collect a historically high 4% dividend yield while they wait for better days. It's also worth noting that Stanley Black & Decker is a Dividend King, so regular dividend increases are the norm here.
2. Helping others help themselves
Rockwell Automation's stock is down more than 35% so far in 2022. Like Stanley Black & Decker, Rockwell Automation lowered its 2022 guidance when it last reported earnings -- only not by nearly as much, taking sales growth down from a range of 11% to 15%, to 10.5% to 12.5%. Adjusted earnings guidance was narrowed to $9.30 to $9.70 per share, which was within the previous guidance range. In other words, there's some problems here, but they aren't exactly huge. Inflation and supply chain issues are the notable headwinds.
Rockwell Automation's business is built around helping customers do more with less. And that is something that becomes more important during economic weak patches like the one that's driving the current bear market. In fact, management reports that Rockwell Automation's backlog of work currently sits at record levels. Despite the stock drop, the shares here are probably best viewed as fairly valued and not cheap. But if you are willing to buy great companies at fair prices, this Dividend Achiever might be a good fit for your portfolio. The dividend yield is roughly 2%, which is about the middle of the yield range over the past decade.
3. An industry stalwart
The last company here is Honeywell International, a diversified industrial giant with an iconic name and reputation. The stock is off by "just" 17% or so in 2022. That's pushed the dividend yield up to around 2.3%, which is on the high side of the yield range over the past decade. It looks relatively cheap for a stock that doesn't go on sale very often.
The big story here, however, isn't really about an eventual business turnaround like Stanley Black & Decker or the possibly hidden value at Rockwell Automation. This is a $115 billion market cap industry giant with a diversified business that's rolling along with the broader investor sentiment trends. The truth is, Honeywell's business is performing pretty well today, with earnings coming in higher than management's guidance in the second quarter and a growing backlog. Given the relative strength here, you can see why the stock isn't down as much as the other two mentioned here. Still, even the more modest stock decline shouldn't be ignored, since it could be a good opportunity for long-term investors to own a strong industrial manufacturer.
Buying while they're down
The key with cyclical stocks like industrials is that you don't actually want to buy them when things are going well. That's because the next economic downturn will likely lead to investors shifting gears and selling them off, perhaps indiscriminately. Economically driven bear markets, like the one we appear to be in today, are the right time to look at the stocks of companies like short-cycle heavy Stanley Black & Decker, Rockwell Automation and its cost-saving equipment, and industry heavyweights like Honeywell International that are falling despite showing still-strong results. If you take a little time to dig in here, one or more of these stocks might end up in your portfolio today.
