Jeremy Grantham is one of those legendary investors who has crossed the Rubicon and is now almost as well known for his support of research into climate change as he is for running his asset management firm Grantham, Mayo, & van Otterloo. The British investor is always highly vocal on big-picture issues like the environment and asset class valuations, so I thought it would be interesting to see what stocks his firm has been buying in an uncertain economic environment.

A bull in front of a rising stock chart.

Image source: Getty Images.

Seven stocks Jeremy Grantham bought

Before diving into the stocks, it's worth noting that the size of the fund is in the ballpark of $14 billion, so even the largest position by value, 3M (NYSE:MMM) at $290 million, only constitutes around 2% of the total portfolio. Meanwhile, one of the smaller holdings in the portfolio, Federal Signal (NYSE:FSS), is arguably more significant as Grantham's position constitutes around 1% of the market cap of the stock, compared with just 0.3% of 3M's.

That said, no one invests in stocks because they are hoping to lose money, so all the buys are relevant. Here are seven interesting industrial stocks worth noting in Grantham's portfolio and how those positions changed in the most recent quarter. 

Company

Industry

Market Cap 

Shares Holding

Current Price

Current Value 

Action

3M 

Multi-industry industrial

$98.1 billion

1,697,284

$170.54

$289.5 million

Added 45,349 shares

United Technologies (NYSE:UTX)

Industrial conglomerate

$128.7 billion

898,926

$149.11

$134.0 million

Added 20,982

Honeywell International (NYSE:HON)

Industrial conglomerate

$128.5 billion

735,817

$179.80

$132.3 million

Added 19,800 shares

Federal Signal  

Infrastructure maintenance machinery for municipalities and industry

$2 billion

585,407

$32.95

$19.3 million

Added 206,464 shares

Applied Materials (NASDAQ:AMAT)

Semiconductor materials

$57.6 billion

132,557

$62.35

$8.3 million

New Position

PACCAR (NASDAQ:PCAR)

Trucks

$27.7 billion

66,762

$80.03

$5.3 million

New Position

Aptiv PLC (NYSE:APTV)

Automotive components

$23.6 billion

25,681

$92.32

$2.4 million

New Position

Data source: Grantham, Mayo, & van Otterloo SEC filings.

The cyclical comeback stories

The three stocks that immediately grab your attention are Applied Materials, PACCAR, and Aptiv. It's been a pretty grim year in the semiconductor sector in terms of operations -- Applied Materials just reported a 13% decline in its fiscal full-year 2019 net sales -- but it's been a great year for semiconductor stock prices as the market has bought into the idea that the trough in the industry has passed -- something recently argued by Siemens CEO Joe Kaeser. Grantham's purchase of Applied Materials could be taken as another vote of confidence in an industry that is traditionally a good early bellwether of the economy.

Trucking is also a highly cyclical industry. And the sector is arguably looking like a good value right now due to being oversold on expectations of a sharp drop in demand in 2020 after a few years of strong growth. But some leading commentators are talking about a bounce in demand in 2021, and history suggests that truck sales tend to overshoot and undershoot industrial production. In other words, if you think that U.S. industrial growth will be solid in 2021 and onward, then there's a strong case for buying trucking stocks like PACCAR.

US Heavy Truck Sales Chart

US Heavy Truck Sales data by YCharts.

In a similar vein, the automotive-supplier stocks have been sold off due to a combination of falling production, the General Motors strike, and concerns over the impact of the trade conflict. That said, valuations across the sector are looking attractive. And if global sales/production could start to stabilize in 2020 -- it surely will at some point -- then buying stocks like Aptiv, as Grantham did, could make sense.

APTV PE Ratio (Forward) Chart

APTV PE Ratio (Forward) data by YCharts.

The industrial conglomerates: United Technologies, Honeywell, and 3M

Grantham's additional purchases of the three mega-cap stocks came before they all gave their third-quarter earnings. Honeywell raised full-year earnings guidance largely on the back of good conditions in commercial aerospace -- United Technologies would later do exactly the same. Trading at 20 times estimated 2020 earnings, Honeywell looks fairly valued, but United Technologies has upside potential due to its merger with Raytheon.

On the other hand, 3M cut guidance for the second time this year, and the company's problems appear to run deeper than just a cyclical slowdown as its consumer and healthcare segments continue to disappoint. 

The small-cap pick

Federal Signal has been raising guidance in 2019 as municipalities and companies continue to buy its cleaning and maintenance machinery. As such, Federal Signal's mix of street sweeping, sewer cleaning, safe digging, and road marking machinery offers investors exposure to the need to maintain and improve U.S. infrastructure. Trading at a P/E of 17.3 times 2020 estimated earnings, the stock looks like a good value, particularly for one with a good long-term growth story.

Looking ahead 

All told, Grantham's purchases probably don't signify any big opinion on the industrial sector, but if you do want exposure to the area, then the stocks above are a good place to start looking for it. There's a nice mix of stocks with recovery potential (Aptiv, Applied Materials, and PACCAR), conglomerates with exposure to a strong aerospace market (United Technologies and Honeywell), a small-cap pick (Federal Signal) and 3M's dividend yield of 3.4%.