"Tech stocks" just sound like fun investments. "Industrial stocks" just...don't. But the tech sector has been as hot as the weather this summer, and that's made bargains hard to find there.
On the other hand, plenty of industrial stocks still look like good values, and some of them even have a fun factor. Three of our Motley Fool contributors shared their top August stock picks with us. These companies will help you surf the internet, splash in the pool, and enjoy a fancy dinner. How's that for summer fun?
Here's why they like Brookfield Infrastructure Partners (BIP -0.80%), Pentair (PNR 0.96%), and Middleby (MIDD -0.20%).
Image source: Getty Images.
Keeping things running
John Bromels (Brookfield Infrastructure Partners): Infrastructure -- the essential physical structures that allow a society to function -- comes in four major categories:
- Energy infrastructure, like oil and gas pipelines, or electricity generators and transmission lines
- Utility infrastructure, like electrical, gas, and water lines to homes and businesses
- Transportation infrastructure, including airports, rail lines, roads, bridges, and ports
- Data and communications infrastructure, like fiber-optic networks and data-storage terminals
The good thing about investing in infrastructure assets like these is that because they provide essential services, they tend to be somewhat recession-resistant and reliable generators of cash flow. Infrastructure asset manager and master limited partnership (MLP) Brookfield Infrastructure Partners owns assets across the globe in all four of those categories.
Overseen by the capable managers at Brookfield Asset Management, Brookfield Infrastructure Partners has been growing by leaps and bounds. Shares are up 277% over the last 10 years. During that time, the MLP's distribution -- MLP-speak for dividend -- has achieved a compound annual growth rate (CAGR) of about 11%. Management expects growth to continue, targeting 6% to 9% annual distribution growth.
So far in 2020, Brookfield Infrastructure Partners' unit price is down 14%, and it's currently yielding more than 4%. That makes August a great time to invest in this diversified infrastructure play.
Making a splash
Lee Samaha (Pentair): Having sold its valves and controls business to Emerson Electric and spun off its electrical products business as nVent Electric, Pentair is now a pure play on residential, commercial, and industrial water treatment. The company currently has two reporting segments, with consumer solutions -- primarily pool equipment -- contributing $181.5 million of segment income in the first half of 2020, compared to $88.8 million from the industrial and flow technologies like filtration and irrigation.
The case for buying Pentair rests on the following ideas:
- The consumer solutions segment is well-positioned for growth in the second half as stay-at-home measures have encouraged strong sales at distributors like Pool Corp.
- Industrial and flow technologies (IFT) will experience a slow recovery as commercial and industrial customers are currently pausing capital spending and reducing aftermarket orders.
The underlying strength in the consumer solutions segment has not been seen in Pentair's results yet, because, as CEO John Stauch outlined on the second-quarter earnings call, "Those orders in Q2 were served through inventory, so there's an opportunity, and certainly, the demand is to refill that inventory in the channel and continue to meet the external demand."
In other words, Pentair's customers are likely to place orders in the coming quarters. Indeed, Pool Corp (responsible for around 15% of Pentair's net sales) recently reported record sales, with growth of 14% in the second quarter.
Unfortunately, things are not looking so rosy for the IFT segment in 2020, although it's likely to recover in 2021 as industrial activity picks up. It's going to be a tough year for Pentair, with management forecasting sales to decline 5% year over year to $2.8 billion and full-year adjusted earnings per share of $2.10 to $2.20, implying a fall of 7.6% to 11.8% compared to 2019.
However, a combination of orders flowing through to the consumer solutions segment and an easy comparison for the IFT segment have Wall Street analysts forecasting mid-single-digit revenue growth and EPS of $2.45 for Pentair in 2021. This puts Pentair's forward price-to-earnings (P/E) ratio at 17.9. That's an attractive valuation for a company exposed to a combination of residential pool equipment and essential commercial/industrial water treatment.
All three stocks have underperformed the S&P 500 so far in 2020. Data by YCharts.
Get cooking with this kitchen equipment manufacturer
Scott Levine (Middleby): With COVID-19 wreaking havoc on the restaurant industry, some investors may find Middleby's 6% year-to-date decline unsurprising, since the company derives about 67% of its revenue from its commercial food service segment. However, I think the market is grossly underestimating the company's ability to persevere amid the current headwinds...and ultimately thrive. The stock has already proven its prowess as a market beater. Over the past 10 years, shares have convincingly outperformed the market, climbing 422%, while the S&P 500 has risen 198%.
Illustrating its strong financial position despite the challenges, Middleby -- the self-proclaimed "largest global manufacturer of commercial cooking equipment" -- generated $87.1 million in cash from operations for Q1 2020: a company record for the first quarter. It followed that up with $77.6 million of operating cash flow for the second quarter: up 15% year over year.
Furthermore, the company hasn't had to strain its balance sheet and rely too heavily on leverage; it ended Q2 2020 with a net debt-to-earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 2.99. The ongoing COVID-19 pandemic will likely drive continued sales volatility for the restaurant industry, which is certainly a challenge for Middleby. But for those (like yours truly) who recognize the company's commanding position as an industry leader and who have the resolve to stick with the company for the long haul, the current pessimism surrounding the restaurant industry is no reason to eschew the stock.
Investors, moreover, have a rare chance to pick up shares of this high-quality stock at a favorable price. Currently, the stock is trading at 25 times projected 2020 earnings of $4.12 per share and 20 times projected 2021 earnings of $5.23 per share. Although analysts seem to believe that Middleby's earnings won't bounce back until at least 2022 -- it reported adjusted earnings per share of $7.02 in 2019 -- I trust management's ability to navigate the company through these uncharted waters. For investors with a long-term investing horizon and the fortitude to withstand some near-term volatility, Middleby represents a great opportunity.
