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Industrial Stocks Poised to Rebound

By Selena Maranjian - Dec 10, 2013 at 3:45PM

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These four industrial stocks are all up by double digits this year.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some industrial stocks to your portfolio but don't have the time or expertise to hand-pick a few, the PowerShares Dynamic Industrials ETF (NYSEMKT: PRN) could save you a lot of trouble. Instead of trying to figure out which industrial stocks will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on industrial stocks, sports an expense ratio -- an annual fee -- of 0.65%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has outperformed the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why industrial stocks?
The industrials sector will profit as the world's economies get back on track. The U.S. economy, for example, is struggling but also improving, and many foreign economies are growing more briskly than ours. As more infrastructure work and construction is undertaken, and retailers keep selling more, many industrial stocks will benefit.

More than a handful of industrial stocks had strong performances over the past year. Delta Air Lines (DAL 1.90%) has nearly tripled over the past year, in an industry that's undergoing a lot of consolidation. While smaller airlines have been focusing on growth, Delta and its big peers are aiming to maximize their capacity utilization. Delta is spreading out, too, boosting its operations significantly in cities such as Seattle and Los Angeles and pushing deeper into London's Heathrow airport by buying a 49% stake in Virgin Atlantic. Delta's revenue and earnings have been growing steadily in recent years, and profit margins are rising while debt shrinks.

FedEx (FDX -1.37%) surged 57% and is near a 52-week high, yielding 0.5%. The company was whacked by our recent recession but is turning itself around. It's cutting costs, hiking rates by 4.9%, and has introduced flat-rate express shipping. FedEx's last quarter featured estimate-topping revenue up 2% and earnings up 5.5%, also exceeding expectations. FedEx is also rewarding shareholders by buying back up to about 10% of its shares. It's expanding internationally and stands to benefit from increased online shopping.

3M (MMM -0.71%) gained 44% and yields 1.9%. After this year's run, though, some see it as no longer much of a bargain, and an analyst at Morgan Stanley recently downgraded it on valuation and a possible plateauing of margins. Some think the innovative conglomerate deserves its relatively rich P/E, but others would like to see more free cash flow. Not everyone thinks of 3M when thinking of industrial stocks, but industrials is its biggest segment. Still, it has a lot of potential in others, such as health care and renewable energy.

L-3 Communications (LLL) advanced 36%, is near a 52-week high, and yields 2.1%. Its third quarter featured revenue a bit below expectations, but earnings-trouncing estimates, and 13% above last year's level. Share count shrunk by 6%, too, which boosts the value of remaining shares, rewarding its investors. Over the past few years, though, revenue and free cash flow have been dropping. L-3 Communication's funded backlog has been shrinking a bit in recent quarters, but is still a respectable $10.6 billion. Its P/E ratio near 12 looks low, but remember that the company isn't growing briskly.

The big picture
If you're interested in adding some industrial stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

 

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Stocks Mentioned

3M Company Stock Quote
3M Company
MMM
$128.49 (-0.71%) $0.92
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$29.52 (1.90%) $0.55
FedEx Corporation Stock Quote
FedEx Corporation
FDX
$223.61 (-1.37%) $-3.10
L3 Technologies, Inc. Stock Quote
L3 Technologies, Inc.
LLL

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