6 Experts Pick Their Favorite Industrial Stocks for 2023

Industrial stocks have been outperforming of late, as investors rotate out of technology and other momentum sectors and shift towards more defensive names. In the MoneyShow Top Picks 2023 report, six investment experts highlight their favorite industrial and manufacturing plays for the coming year. Jim Pearce, Investing Daily's Personal Finance I must admit, I was a bit surprised when my Personal Finance Pro stock screener flagged General Motors as being undervalued. The stock -- my top conservative pick for 2023 -- has never traded at a high multiple to sales or earnings, which is currently the case. But after taking a closer look at its recent operating metrics and guidance for 2023, I am convinced that it could appreciate significantly. At the start of 2022, GM was trading above $60 less than two years after bottoming below $20 in the wake of the coronavirus pandemic. But once the Fed started raising interest rates to combat inflation, the automobile sector fell hard since most new car purchases are made with borrowed money. However, that has not dampened demand for automobiles. In fact, total vehicle sales in the United States have increased nearly 20% since May to reach their highest level since January. That may be why General Motors raised its guidance for 2022 and stated that it expects its rapidly growing portfolio of electric vehicles will be solidly profitable in 2025 in North America. Of course, no discussion of the electric vehicle (EV) market is complete without mentioning Tesla , which finds itself in the unusual position of being on the outs with Wall Street these days. That may be due in part to the increasingly erratic behavior of its founder and CEO, Elon Musk, who is currently consumed with his recent acquisition of Twitter. Despite losing more than half its value over the past year, TSLA is still priced at more than 33 times forward earnings compared to a multiple of less than 7 for GM. Of course, the comparison is not entirely fair since Tesla only makes EVs while they only comprise a small fraction of GM's total revenue. If the company's guidance for EV sales proves true, then GM should earn higher multiples to sale and profits from Wall Street. This isn't the type of stock that is going double overnight, but it is the type of stock that could catch Wall Street by surprise. Jim Woods, Successful Investing One of my top 2023 selections is Lockheed Martin Corp. . LMT is the world's largest defense contractor, and as such it has dominated the Western market for high-end fighter aircraft since the F-35 program was awarded in 2001. Lockheed's largest segment is aeronautics, with segments including rotary and mission systems, missiles and fire control and space systems. In December 2022, the United States was in the process of finalizing plans to provide Ukraine with Patriot missile-defense systems in its war against Russia, and this could be a big revenue driver for LMT. That's because while the Patriot system is built by Raytheon Technologies , the missiles it fires are made by Lockheed. Think of the Patriot deal as what I call bullish NewsQ, i.e. news that can move a stock higher, and news that can help drive LMT shares higher in 2023. Yet what I like about LMT is not just the bullish NewsQ, but also its earnings growth and its 2022 share price performance. On the earnings front, the company's recent quarterly and annual earnings per share growth rates are in the top quintile of all companies, and I expect this metric to rise into next year. On the share price performance front, LMT's year-to-date gain of 35.5% (through Dec. 16) was good enough to vault it into the top 6% of all companies in terms of relative price strength. Finally, what 2022 has shown via the Russia/Ukraine war is that the world is still a very dangerous place, and one where conventional warfare in Europe could very well be a reality. As a result, governments must get ready, and that means they need LMT. Ben Reynolds, Sure Dividend 3M is an iconic industrials sector business that was founded in 1902 and has paid rising dividends for an incredible 64 consecutive years; this large-cap company currently has a market cap of more than $68 billion. While 3M has a long history of success, it's currently facing a legal battle surrounding claims that nearly 300,000 earplugs provided to U.S. combat troops by 3M subsidiary Aearo Technologies were defective. On July 26th, 2022, 3M announced that Aearo Technologies had filed for bankruptcy. But unfortunately for 3M, on August 26th, 2022, 3M announced that the court decided Aearo's bankruptcy would not protect 3M from earplug litigation. On October 13th, 2022, a federal appeals court agreed to hear 3M's appeal related to the lower court's ruling. The largest corporate settlement in history outside of the 'Big Tobacco' settlement is BP's $20 billion settlement (paid out over 15-18 years) for the Gulf of Mexico oil spill disaster. And ~75% of that settlement is tax deductible. This should be viewed as an absolute worst-case scenario for 3M, with the actual settlement likely to be much less (it looks more similar to cases that came in for $2 billion to $3 billion in my non-legal-expert view). For comparison, the company's after-tax profit has been more than $4 billion every year from 2012 through 2021. While it's impossible to know the full extent of the damages this court battle will result in for 3M, I don't believe the company is at risk of insolvency from this - nor do I believe the long-growing dividend is at risk. And as for current earnings power, 3M's 3rd quarter 2022 earnings release showed adjusted earnings-per-share guidance for fiscal 2022 of $10.10 to $10.35. For comparison, the company generated adjusted earnings per share of $6.32 in fiscal 2012 (10 years ago), peak adjusted earnings-per-share of $10.46 in 2018, and $10.12 in adjusted earnings-per-share last year (fiscal 2021). The company's stock trades for a price-to-earnings ratio of just 12.2 using fiscal 2023 guidance midpoint expected adjusted earnings-per-share of $10.22. The company has regularly traded for a price-to-earnings ratio of ~20 historically. We believe a fair price-to-earnings ratio for 3M is ~17, implying ~40% upside from current prices. In addition to the low price-to-earnings ratio, 3M stock also offers investors a high dividend yield of 4.8%. And the dividend is likely to grow in the future based on the company's long streak of rising dividends. We expect moderate growth of ~5% annually for 3M. This growth coupled with the company's low valuation and high yield makes 3M a compelling choice for investors interested in buying into a high-quality business with a shareholder friendly management at a discount price. Faris Sleem, The Bowser Report TechPrecision -- a growth-oriented idea for 2023 -- manufactures and sells precision, fabricated, and machine metal structural components in the United States. It operates through two segments, Ranor and Stadco. Its Ranor subsidiary services its customer base with well-engineered, cost-effective solutions to meet their large-scale manufacturing challenges. The company is rebuilding its Stadco segment, while its Ranor segment had net sales of $4.9 million and gross profit of $2 million in the second quarter. Its investments in the Ranor segment are already paying off and we believe management will be able to do the same for its Stadco segment. TPCS quarterly revenue grew 78% yoy to $8.5 million, and it has total backlog of $49.4 million. This backlog is expected to be delivered over the next 1-3 fiscal years with improved gross margins. The substantial backlog in combination with its sizable investments in Stadco make TPCS a long-term investment with high reward. In addition to its high potential, the company has a strong fundamental foundation. Assets outweigh liabilities 1.7:1 and it has working capital of $3.3 million. While total debt currently outweighs its cash on hand, the company has a history of delivering positive cash flows. As for its competitive advantage, its products speak for themselves. Stadco has been stable and growing since 1941, serving domestic and international clients. Ranor won Supplier of the Year for Virginia Payload Modules by BAE Systems and the segment has bounced back tremendously in recent years. We believe that as long as Ranor continues to grow profits and invests efficiently and Stadco, TPCS could go as high as $3 in the long haul. Additionally, management has expressed interest in uplisting to the Nasdaq, which could improve visibility and liquidity for the stock. Overall, TPCS has healthy financials, high revenue growth, and the potential to create value for long-term shareholders. The stock is down 13% over the past year despite growing revenues and profits. Bob Ciura, Top 10 Dividend Elite Income investors looking for a dividend growth stock trading at a discount should consider Stanley Black & Decker , which has a long history of reliable dividend hikes. Stanley Black & Decker has increased its dividend for 55 consecutive years, qualifying it for the exclusive list of Dividend Kings. And, because the share price declined around 50% in 2022, shares now yield 4%. This represents a 10-year high dividend yield for Stanley Black & Decker. At the same time, the steep decline in share price this year has created a notable discount for this quality company. Analysts currently expect SWK to generate 2023 earnings-per-share of $4.52, equaling a forward price-to-earnings ratio of 18x. Of course, there is a reason for SWK's declining stock price and valuation. The company has been hit hard by rising inflation and slowing global economic growth. This has taken a steep toll on the company's profits, although revenue continues to grow at a strong rate. On October 27th, Stanley Black & Decker announced third quarter results. Revenue grew 9% to $4.1 billion, topping estimates by $120 million. However, adjusted earnings-per-share of $0.76 compared very unfavorably to $2.77 in the prior year period. Adjusted gross margin contracted 760 basis points to 24.7%, as higher prices were more than offset by higher commodity inflation and lower volume. Stanley Black & Decker's key competitive advantage is that its products are well-known and respected by customers. This was why the company has been able to increase prices in certain product categories over the years and not see a decline in sales. Fortunately, the company has a plan to combat inflation and improve profitability. Stanley Black & Decker has engaged a global cost-cutting program that delivered $65 million in pre-tax savings during the quarter. The company's goal is to reduce expenses by $1 billion by the end of 2023 and by $2 billion within three years. In the meantime, Stanley Black & Decker remains more than profitable enough to maintain its dividend and continue to raise the dividend each year. The 2022 payout ratio of ~73% makes it likely that dividends will continue rising even through a serious economic downturn. Stanley Black & Decker is a Dividend King with a dividend yield at a 10-year high and an attractive valuation. John Eade, Argus Research Deere & Co. -- a Top Pick for 2023 -- develops and delivers global equipment and technology solutions for production-scale growers, mid-size and small growers as well as turf customers. The company -- founded in 1837 -- also manufactures and distributes a broad range of backhoe loaders, crawler dozers and loaders, four-wheel-drive loaders, excavators, motor graders, articulated dump trucks, and landscape loaders; it also finances purchases and leases of Deere equipment. As a global manufacturing company, Deere is affected by worldwide trends in trade policies, exchange rates and commodity prices. However, Deere management understands, and does a good job of managing the factors it can control, such as pricing and costs. Sales and earnings are benefitting in the current environment from relatively high commodity prices; volumes are picking up. Meanwhile, Deere management has taken steps to reduce costs, and is targeting all-time high margins. A new CEO and CFO have been appointed recently, and both are from Deere's innovative Precision Ag group. We see continued solid earnings power in the quarters ahead, as new management innovates to improve products and the company's customers carry out the essential work of promoting food security. In our view, the shares offer value despite a recent strong performance. DE shares have outperformed over the past quarter, gaining 19% while the S&P 500 has fallen 3%. Over the past year, the shares have also outperformed the market with a 26% gain compared to a 15% decline for the S&P 500. We think that DE shares are attractively valued at current prices near $438, at the high end of the 52-week range of $283-$448. From a technical perspective, DE shares have been in a bullish pattern of higher highs and higher lows dating back to July. On a fundamental basis, the shares appear favorably valued by historical standards and relative to peers. The shares are trading at 14-times our FY23 EPS estimate, compared to a 20-year historical average range of 10-24. Compared to the Industrial peer group, DE shares trade at below-average P/E and above-average price/sales ratios. We see solid earnings power in the quarters ahead as management takes steps to boost margins. In our view, the shares continue to offer value. We think that DE shares are a suitable core Industrial holding in diversified portfolios. Our price target is now $475.

6 Experts Pick Their Favorite Industrial Stocks for 2023

Investment pros highlight their favorite industrial and manufacturing plays for the coming year.

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