Industrial stocks are ideal to buy in a bull market. Companies tend to increase spending when their cost of capital is cheap. But industrial stocks look less compelling with rising interest rates, an uncertain employment picture, and geopolitical concerns.
And as an overall sector, that’s probably true. In many cases, you don’t want to be trapped into believing this time is different.
But the history lessons also teach investors that quality matters in unfavorable economic conditions. And there are still some quality industrial stocks you can buy even with uncertainty about the economy. Many of these companies are well-established with a solid track record of reliable performance.
Plus, in some cases, these companies pay a consistent dividend which can help bridge the gap in total return when their stock price is under pressure. And this article will make a case for three industrial stocks looking to finish the year strong.
1. Honeywell
Honeywell (NASDAQ:HON) is an industrial conglomerate. The advantage for investors is that one of its diverse business units is likely to be outperforming the market. That’s why HON stock is up nearly 60% over the last five years despite being down nearly 15% in the last 12 months. And that’s also why the company could outperform again in the back half of 2022.
Honeywell reported second-quarter earnings in July with a beat on both the top and bottom lines. The beats weren’t eye-popping (3% on EPS; 10% on revenue). However, investors know the key in this past quarter was the guidance. And on this score, Honeywell continued to take a cautiously optimistic note.
Earnings per share are expected to come between $8.55 and $8.80, which would be a year-over-year gain of 6% on the low and 9% on the high end. Furthermore, Honeywell expects free cash flow (FCF) from $4.7 billion to $5.1 billion. While that would be the lowest full-year FCF for the company since 2017, it would have no discernible impact on its dividend, which has been increasing for the last 12 years.
2. Caterpillar
Caterpillar (NYSE:CAT) operates in the construction, resource, and energy/transportation markets. The company is forecasting promising demand despite ongoing supply chain challenges. And while you might not think of Caterpillar as a clean energy play, the company is investing in sustainable equipment, including hydrogen power.
Caterpillar was expected to beat on earnings in its most recent quarter. While it missed slightly on the revenue, it beat on earnings for the ninth quarter. Plus, both the top and bottom lines were higher year-over-year. The company is still reporting a solid backlog that should propel these numbers higher in the back half of the year.
CAT stock is trading at a price-to-earnings (P/E) ratio of around 15x, which makes it an attractive valuation to other stocks in the sector. And the company is part of the exclusive dividend aristocrat club, having increased its dividend in the last 29 consecutive years.
3. John Deere
In each of the company’s last three earnings reports, John Deere's (NYSE:DE) stock has dipped following earnings. Some of this may be due to the company not meeting elevated expectations. However, after an initial drop after reporting its third-quarter earnings, DE stock is recovering, which could be the start of a strong year.
If it does finish strong, it will be in no small part because of the strong demand in its large agriculture business. John Deere also appears to be in a prime position to capitalize on the global push to find solutions for sustainable farming.
DE stock has been up 214% in the last five years. However, the stock is still 17% off its 52-week and an all-time high. The stock has a fair valuation with a P/E ratio of just over 18x earnings.