Four Compelling Reasons to Buy Industrials

 | Dec 16, 2013 | 12:00 PM EST
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I spent a good portion of the weekend reading through various analysts and Chief Economists' market assessments for 2014. Consensus projections seem to be pointing to around a 10% gain in equities for next year.

The manufacturing and industrial sector also seems to be getting a lot of attention as a sector that can outperform the market in 2014. Here are four compelling arguments for overweighting this area of the market that seem to coalescence around these themes:

  1. Global growth should be a bit better in 2014. Europe is no longer contracting and China seems to have avoided a hard landing.
  2. The consensus is calling for domestic GDP growth to tick up another 1% next year as the economy continues to mend -- with any luck we will avoid the dysfunctional political hiccups we experienced this year.
  3. American manufacturing should continue to be buoyed by the lowest energy prices in the world.
  4. Fixed investment is currently running at 13% of GDP. This is down significantly from the 16% to 21% range it had generally run in from 1950 to 2007. Greater business confidence could power greater investment in 2014.

There are several well-known names in these areas I have held throughout most of 2013 and I continue to see value in them as we head into 2014.

I still like automakers Ford (F) and General Motors (GM). Their European operations are improving even as they continue to lose money on the continent. Both American manufacturers are also gaining market share and showing impressive growth in China. Ford just booked almost 50% year over year gains in the last monthly vehicle sales report.

Domestic auto production is likely to remain at high levels as auto sales continue to move towards pre-crisis levels. General Motors is the slightly cheaper of the two, as the shares are selling at around 8.5x forward earnings. The stock should also benefit from the recent disposal of the remaining shares that the government held from its bailout. The company has a substantial net cash position on its balance sheet. The departure of the government should allow the company to pay a dividend again in 2014 as well as to buy back stock.

Ford is a bit pricier than GM: The stock is trading at just over 9x forward earnings but it also pays a 2.4% dividend yield. The possible departure of its well-regarded CEO has been an overhang on the stock recently but that matter should be resolved one way or another soon.

Ford has a significant number of new car models rolling out next year and the company is planning to open two more plants in China as well. One of the most critical new models to market in 2014 is the company's F-150 series truck. This is a critical launch as trucks carry much higher margins than cars. I would look for a successful rollout to nicely boost earnings.

It is difficult to talk about large-capitalization American manufacturers without mentioning General Electric (GE). The company continues to lessen its reliance on its financial businesses while building up its big ticket industrial, medical and energy services offerings. The next major step toward that goal will happen in 2014 as the company spins off the U.S. consumer lending business of its finance arm via an initial public offering (IPO), which should occur in the first half of next year.

General Electric also announced a 16% hike to its dividend last week. The company has now increased its dividend payout about 120% since 2010, and the stock now yields 3.3%. General Electric trades roughly in line with the overall market based on a forward price earnings basis. This industrial concern is well-positioned to continue to benefit by the faster growing demand in emerging markets for its major industrial offerings such as jet engines.

I don't believe these American manufacturing icons will deliver the same stellar returns in 2014 as they have so far in 2013. However, given the current global economic and market outlook, a total return of 10% to 15% seems reasonable for 2014.

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