Whoever thought there would be a shortage of industrial stocks to buy in an era where the country's steeped in patriotism to buy American? It's hard to believe but the landscape is bereft of manufacturers and the ones we have are either outrageously expensive, like Caterpillar (CAT) , or fighting for their lives like like U.S. Steel (X) .
How can this be? Some of it has to do with the high cost of labor here versus the lower cost in, yes, China, or South Korea. But there's also an understanding that we just don't get start-ups in this world. If you look at the companies coming public they are most likely in the software as a service world, or biotech, or the innumerable SPACs that can be industrial or can be anything for that matter.
Take the most classical industrial in the Dow Jones Averages, the aforementioned Caterpillar. Here's a company with a CEO, Jim Umpleby, who is determined to get his stock higher and has succeeded spectacularly, giving you a 14% gain in the midst of one of the worst recessions in history. Some of that gain comes from a decision to buy back stock aggressively - more than 10% of the float. But a lot is just plain old multiple expansion from, in my opinion, the equity manufacturing shortage. That's how you get a 32 P/E on this premier industrial, trading at $168, that is more levered to a faltering oil price than to the ascending China.
Or Deere (DE) . We make the premier farm equipment in the world, albeit among the most expensive. A combination of election year handouts and a robust ag complex, has led to an outstanding 38% gain, but with a price to earnings ratio of 31, another company with a cloud-like multiple.
Now there's opportunity here if you really believe. Despite the decline of U.S. Steel, Nucor (NUE) has a 3% yield and plenty of business, a potential bargain at $49, a 21 P/E, down 12% for the year. There's been some movement in steel for autos, not much else. We will find out this week; the company reports on October 22. Remember, though, the company gives updates intra-quarter so don't expect a surprise.
There's 3M (MMM) , which intrigues, with a 3.4% yield, with a price tag of $170 down 3% for the year. I like this one as a Trump play because I think it's been held back by worries about old pollution claims that would be sloughed off under a distinctly anti-environmental president. Lots of China here, not bad with a 20 P/E.
Same with Emerson (EMR) , tons of China, at $70, off 8% with a 21 P/E. Lots of nuts and bolts. Ingersoll Rand's (IR) stock is cheaper and in many ways, better, with a similar profile, up a percent for the year but with an unfathomable 29 P/E. Finally let's take Illinois Tool Works (ITW) , a terrific company that stumbled a couple of years ago and has come roaring back. It's rally has been relentless, up 15% with a 35 P/E. Some may think it has run too much. I look at it differently. In a momentum driven market it's a real favorite.
There are some others steeped in auto and aerospace, both of which are improving. But I think what distinguishes this group is a lack of creation: we just don't make new ones and the old ones have plenty of capital to buy back stock. The chemical companies as represented by Dow (DOW) , and the papers, by WestRock (WRK) and International Paper (IP) look good, too.
Beware though, earnings are coming. I suggest waiting at this point on the ones that are up, but buying of the ones that are flat to down. It's pretty simple: the market is hungry for these and the ones that are up merit it by their visibility more than anything. Opportunities abound: infrastructure, stimulus, China. Just don't get carried away as the group has everything going but real earnings growth, something that tends to drive stocks higher than any shortage might be able to generate.
