Industrial stocks can be a tough nut to crack for many investors. At their best, they are solid long-term wealth creators thanks to smart capital allocation and cash returned to investors. That isn't always the case, though, as many struggle to make good investments through the ups and downs of the market.
We asked three Motley Fool contributors to each highlight a stock they see as a great investment to watch this month. Here's why they picked Vestas Wind Systems (VWDRY 0.78%), General Electric (GE 0.99%), and Nucor (NUE 0.79%).
See which way the wind blows
Jason Hall (Vestas Wind Systems): The past few years have been a bit up and down for Vestas investors; frankly, that's not unusual for the company's stock thanks to the cyclical nature of its business. Vestas makes, sells, and installs wind turbines, and since its primary customers are large utilities funding big projects, demand can swing substantially from one year -- or even quarter -- to the next.
And those swings in demand can affect investor confidence and expectations, moving the share price around significantly. This year alone makes for a pretty good example:
Even though it's generally followed the S&P 500 up and down, Vestas stock has proven far more volatile in its swings.
This is why investors would do well to tune in on August 15, when the company reports is second-quarter results, moving away from what the stock is doing, and focusing on the business. That's particularly important right now, as Anders Runevad, the CEO who took over in 2013 and led Vestas through a major transformation, announced in May that he was stepping down.
Runevad has been succeeded by Henrik Anderson, who joined the board in 2013 and has worked closely with Runevad on Vestas' turnaround. So even within this leadership change, there should be continuity, but this marks the first chance for investors to hear from the new CEO.
Just as importantly, Vestas' operating results have declined over the past couple of years, but its backlog -- for both turbines and services -- is the biggest it has ever been. That could bode very well for investors looking to make an opportunistic investment on the company's long-term prospects.
This beleaguered industrial giant is quietly making a comeback
Matt DiLallo (General Electric): The past year has been challenging for iconic industrial giant GE. The company has gone up against several headwinds, which negatively affected its cash flow. That put significant pressure on the company's balance sheet, which forced it to take several actions to get back on solid ground.
The company's turnaround plan, though, is starting to pay dividends. That was beginning to become more apparent during the second quarter.
On one hand, the company posted weaker results as revenue and adjusted earnings declined by a low-single-digit rate while adjusted industrial cash flow tumbled further into the red. However, the company also showed some notable positives. Organic revenue at its core industrial businesses jumped 7.4% after adjusting for the impact of asset sales and foreign currency fluctuations.
Meanwhile, one of the causes of the cash burn was related to the ongoing issues with Boeing's 737 MAX. Overall, the company's results through the first half of the year have come in slightly better than it anticipated. Because of that, the company boosted its full-year forecast, which included increasing its industrial free cash flow target by $1 billion, putting it roughly at a break-even level.
While GE's results are getting better, it still has much work to do. For starters, it has several asset sales to complete, which will further boost its balance sheet. In addition to that, the company also needs to continue improving its power, renewable energy, and aviation segments. Finally, it has to start generating free cash once again.
GE seems to be turning around. That makes the industrial giant such an intriguing stock to watch these days.
Don't overlook this top steel producer
Tyler Crowe (Nucor): Buying cyclical stocks like steel producers is always a challenge because even a well-run business bought at a high price can result in poor returns. So now that we're more than a decade into this economic expansion, it's not unreasonable to think that a contraction will come sooner than later.
This reason alone would be a good reason to avoid steel stocks because, for the most part, steel stocks have been poor investments through the ups and downs of the cycle over the past couple of decades with a notable exception: Nucor.
Nucor's management has done a fantastic job of creating value for shareholders through the ups and downs of the industrial market cycle. It is able to do this thanks to some structural advantages in the business such as it using electric arc furnaces instead of older blast furnaces to produce steel and having a "pay for performance" salary structure for all employees, not just the c-suite.
What's more, management has used the cyclical nature of the steel industry to its advantage. When times are good -- as they are now -- the company invests internally on ways to lower costs and move up the value chain. When the market hits the skids, it focuses on acquisitions to complement its footprint. It's moves like this that have allowed it to remain consistently profitable and to generate value for its shareholders no matter the market cycle.
On paper, shares of Nucor look cheap. They currently trade at a price-to-earnings ratio of 7.2, and its dividend yield -- 3% -- is the highest it has been in three years. This may not make the stock a screaming buy right now, because we could be approaching an economic contraction sooner than later. If one is just around the bend, though, there are few industrial companies better at navigating the market cycle than Nucor. Investors should be on the lookout for an opportune time to pick up shares.