Industrial stocks have lagged the overall market over the past few years, as investors focus their attention on technology, especially as the artificial intelligence revolution takes hold.
The S&P 500 Industrials index has posted annualized total returns of 8.6% over the past year, 16.7% over the past three years and 13.7% over the past five years.
That trails the overall S&P 500, which has returned 15%, 20.6% and 15.3% during those periods. Tech stocks hold an even stronger advantage, with the S&P Information Technology index returning 25.8%, 34.9% and 22.3% for those periods.
But now may be a good time to consider industrial stocks, with the White House acting strongly to boost the manufacturing sector. It’s doing that through direct subsidies, tax breaks, equity investments in companies such as Intel (NASDAQ: INTC) and deregulation.
Here are some stocks that may thrive:
Caterpillar (NYSE: CAT)
The world’s biggest maker of construction and mining equipment is the quintessential industrial company. Management has delivered on the financial targets it set eight years ago. That was to boost profit margins 300-600 basis points, generate $4 billion-$8 billion in annual free cash flow, and return almost all free cash to shareholders via repurchases and dividends.
Revenue soared 10% in the third quarter from a year earlier, to $17.6 billion. Profit per share slipped 3.6%, but the latest number reflected one-off tax hits.
The company particularly benefited from the explosion in data-center construction to accommodate expansion in artificial intelligence. That led to a 17% revenue rise in Caterpillar’s energy segment.
“The very robust growth in energy and transportation is starting to look more like a structural growth story,” wrote Morningstar analyst George Maglares. That includes 20% growth in oil and gas and 30% growth in power generation, which is primarily serving the AI-data center boom.
Caterpillar’s stock has gained 43% over the last year.
AutoZone (NYSE: AZO)
“Get in the Zone,” the biggest U.S. auto-parts retailer says in its TV commercials. And the company is in the zone itself, as its stock performance shows. The stock has jumped 26% over the past year, 55% over the past three years and 250% over the past five years. Those numbers far outpace the S&P 500.
“AutoZone differentiates its retail operations by offering robust customer service to its do-it-yourself (68% of U.S. sales) and commercial customers (32%), while maintaining ample parts availability across a wide range of vehicle makes and models,” writes Morningstar analyst Kristoffer Inton.
About 85% of AutoZone’s sales consist of vital products that need maintenance and are prone to failure, such as alternators, batteries, and spark plugs. The company’s customers are looking more for product/service quality and convenience than a low price, Inton notes.
AutoZone’s strength showed through in its latest sales figures. While overall revenue gained only 0.6% in the quarter ended Aug. 30 from a year earlier, same-store sales climbed 5.1%. AutoZone particularly excelled in sales to the professional segment — paid mechanics, garages, and repair shops. Domestic sales rose 12.5% in that area.
Waste Management (NYSE: WM)
This company is in a messy business: comprehensive waste management environmental services, which consists principally of picking up and disposing waste. Yuck, but there’s money to be made, and Waste Management is the largest player in its field by revenue.
Morningstar analyst Matthew Young offers an excellent summary of the company’s business model. “As a fully integrated waste-hauler, the firm leverages a vast network of collection routes and transfer stations,” he wrote.
“That bestows significant control over the waste stream, funneling waste from numerous end-market customers (commercial, industrial, and residential) into its highly valuable landfill assets. WM collects fees from third-party waste haulers that use the firm’s transfer stations and landfills.”
Waste Management has executed several acquisitions to expand in recent years. Last year it got into the medical waste business with the purchase of Stericycle for an enterprise value of $7.2 billion.
The company has suffered in recent quarters from price drops for recycled commodities and renewable energy tax credits. It recently lowered its revenue forecast for full-year 2025. The stock has dropped 4% over the past year, but many analysts think it will rebound.
As usual, do your due diligence on any stocks you might buy. Gains are never guaranteed.
Comments