Next to information technology, which economic sector is the best performer over the last five years?
That’s right, it’s industrials.
S&P 500 industrial stocks have generated a 72% cumulative return since January 2019. Although this lags the return of the broader market (87%) and certainly that of technology (208%), it’s better than any of the other nine GICS sectors out there.
Granted, industrials are a melting pot of many industries. Construction and engineering stocks have soared 380% in the past five years. Passenger airline stocks have descended 35%. Toss in machinery, building products, defense and several other categories, and industrials are probably the most diverse group around. This makes it a difficult sector to play when it comes to building an investment portfolio.
Given its growth attributes though, industrials deserve a place in a diversified account. Over the last 12 months, sector revenue and earnings per share (EPS) have grown 13% and 44%, respectively. This means industrials have good momentum heading into 2024 where new growth catalysts lie ahead.
In the near-term, industrial companies could benefit from a strengthened U.S. economy. Lower interest rates and inflation would spur manufacturing and overall business and consumer activity. Longer term, government infrastructure spending, domestic onshoring and sustainability initiatives are all expected to drive sector growth.
While the S&P is flat year-to-date, industrials are down 1.6% (through January 8th). The slow start has prompted Wall Street research groups to press the upgrade button on several companies. With earnings reports soon approaching, these three upgraded stocks may get the spark they need to fulfill analysts’ predictions.
What are ODFL’s growth drivers?
Old Dominion Freight Line, Inc. (NASDAQ: ODFL) operates one of the nation’s largest freight transportation networks, encompassing 57,000 tractors and trailers and 257 service centers across 48 states. On Monday, Susquehanna upgraded the company’s stock after it dipped from its December 2023 peak of $418.93. The analyst bumped his rating from Neutral to Positive in part because ODFL has pricing power in the less-than-truckload (LTL) space.
The company’s ability to charge above-market prices is based on its best-in-class network capacity and service. In October 2023, ODFL shares fell as low as $357.00 after it reported a 6% decline in third-quarter revenue that stemmed from lower volumes. The turnaround thesis is that improved customer volumes in a strengthening economy combined with premium pricing will lead to stronger 2024 financial performances. In the long term, ODFL is well-positioned to benefit from de-globalization trends that are expected to give domestic businesses bigger roles in the supply chain.
Susquehanna’s Street-high $470.00 price target implies 20% upside from current levels. ODFL reports fourth-quarter results on January 31st.
What is the best U.S. rail recovery play?
With more than 123,000 cars online, CSX Corporation (NASDAQ: CSX) is one of the country’s largest railroads. Its 20,000-mile rail network connects 23 eastern U.S. states, transporting goods to a wide range of customers. The S&P 500 industrial was also upgraded to Positive at Susquehanna this week. It was given a Street-high $42.00 target that points to a 22% upside. The analyst referred to CSX as “the cleanest play on a U.S. rail recovery,” absent any negative recent events (such as Norfolk Southern’s toxic derailment in East Palestine, Ohio).
CSX has clawed to within a few bucks of its $38.63 record high — but still offers good value. It is trading at 18.5x trailing earnings compared to 25.4x for the industrial sector as a whole. The stock also pays a dividend that has been increased for 19 straight years, making it a Dividend Contender. CSX had a rare EPS miss in Q3 but will look to bounce back January 24th when it reports Q4 numbers.
How can you invest in a construction industry rebound?
TopBuild Corp. (NYSE: BLD) is one of North America’s top installers and distributors of building materials and insulation products. On Monday, the construction rebound play was upgraded from Hold to Buy at Loop Capital. The analyst gave the stock a $405.00 price target that equates to a 14% upside. Four days earlier, Truist Financial downgraded BLD from Buy to Hold, but with a $410 target that exceeds the Loop Capital target.
The mixed views likely relate to a U.S. housing market that is in a state of uncertainty. The average 30-year fixed mortgage rate has come down from October 2023 peak levels, but at 6.6%, it remains historically high. Until a more meaningful decline occurs, homebuilding activity could be muted.
At the same time, however, a shortage of available homes for sale could drive increased demand for new builds and, thereby, residential construction products such as those sold by TopBuild. The tug-of-war between mortgage rates and housing supply will be an interesting battle to watch in 2024. If the tide swings in favor of residential construction bulls and commercial building activity improves, TopBuild could be a top industrial stock this year.
