The stock market is full of stories and narratives. Getting too caught up in a particular narrative can often lead investors to make short-term-minded decisions or lose sight of what matters most -- which is compounding wealth over time.
The artificial intelligence (AI) boom has its opportunities. But putting the blinders on and focusing too much on AI may lead investors to miss out on some incredible booms that are hiding in plain sight.
Delta Air Lines (DAL 0.08%), Caterpillar (CAT 1.59%), and Toyota (TM 0.60%) showcase several booms across the industrial sector that have room to run. Here's why each blue chip stock is worth a look now.
Image source: Getty Images.
Delta Air Lines is recovering well
Lee Samaha (Delta Air Lines): While awareness of AI has gone mainstream and become a significant investing theme in 2023, it's not the only hot sector this year. Following the outbreak of the pandemic, there's been a concern that consumers wouldn't want to travel as they did before. Fortunately, that fear has been well and truly dispelled by the ongoing recovery in commercial aerospace this year.
While much of the consumer sector has been engulfed in doom and gloom thanks to rising interest rates putting pressure on consumer discretionary spending, it's easy to overlook that there's been a switch in spending this year. In other words, consumers have moved away from purchasing physical goods (much of which they did in the pandemic) in favor of services and experiences, including travel.
Indeed, Delta Air Lines has raised its earnings and margin guidance throughout the year, as the initial recovery in domestic travel has been joined by higher-margin corporate and international travel. As such, Delta is set to significantly increase its cash-flow generation in the coming years enabling management to pay down debt.
While airlines haven't always been great investments for equity investors, Delta is relatively conservatively run, and its focus on the premium market means it stands well to profit from a marketplace currently characterized by under-capacity. The stock's valuation remains attractive, and Delta is an excellent option for investors looking for exposure to an industry with solid momentum in 2023.
Caterpillar is no longer a sleeping giant
Daniel Foelber (Caterpillar): When you think of top-performing stocks in the Dow Jones Industrial Average, some that come to mind may be Apple, Microsoft, or Salesforce. And while all those stocks have had monster years in 2023, one stock that often gets overlooked is Caterpillar.
Caterpillar made a fresh all-time high earlier this month. The stock is up a staggering 53% over the last year and 19% year to date, easily crushing the performance of the broader industrial sector.
The main driver behind Caterpillar's epic run is that its excellent results just keep getting better. Last quarter, the company generated record-high revenue, net income, and free cash flow.
CAT Free Cash Flow (Quarterly) data by YCharts.
Caterpillar made some key acquisitions during a vulnerable time in 2020. These acquisitions are paying off as Caterpillar's end markets are thriving right now. The company made an 8% dividend raise in June and is using spare free cash flow to buy back a ton of its own stock.
Caterpillar is often viewed as an economic bellwether for construction, oil and gas, marine and ground transportation, mining, agriculture, and other key industries. The company's results show the real-world economy is doing very well right now even though there's so much attention on the digital world.
This isn't to say that investors shouldn't invest in artificial intelligence and other growth trends. But it does prove the advantages of maintaining a diversified portfolio with industry-leading companies from a variety of sectors.
Toyota has enjoyed a much smoother road so far in 2024
Scott Levine (Toyota): With a dividend hovering near a forward yield of 3% and a market cap north of $226 billion, Toyota is another blue chip stock that has raced higher recently. Since the start of the year, shares of Toyota have driven about 22% higher while the S&P 500 has risen almost 17%.
Unrelated to the boom that AI stocks have experienced, the company's advancement in solid-state batteries and a strong quarterly earnings report have powered the rise in Toyota's stock. In mid-June, Toyota announced a breakthrough in its solid-state batteries program, and it expects to start producing the batteries for use in their electric vehicles in 2027 or 2028. The Japanese automaker's stock, consequently, soared 18% in June.
More recently, Toyota reported strong first-quarter 2024 financial results. On the top line, Toyota achieved a 24% year-over-year increase in sales and a 78% increase in net income compared to the same period last year. Looking ahead, Toyota's 2024 outlook also revved up investors' engines as the company foresees modest growth in 2024. Should the company achieve its revenue and net income forecasts, it will represent year-over-year growth of 2.3% and 3.5%, respectively.
While its electric vehicle (EV) companies often grab the lion's share of headlines, investors with a more conservative bent who are also interested in EV exposure would be well served to keep Toyota in mind. The company's strong recent performance indicates that it has worked through some of the supply chain challenges that represented potholes last year. Moreover, it's worth keeping an eye on the company's progress with its solid-state batteries. If the company achieves success with the program, it will mean Toyota's EVs will have much greater appeal than EVs with traditional lithium batteries.
