There’s been a change in character in the market lately, with many of the high-flying technology stocks that have rallied for the majority of the year experiencing heavy selling. Investors are likely profit-taking after a massive run in some of the hottest sectors, and it’s interesting to see many of the big tech stocks sold even after they reported solid earnings. When we see selling as we have over the past few weeks, sometimes the sectors that have been lagging can start to rally. That’s exactly what we are seeing now with industrials, as it appears that a rotation into that sector is underway.
Industrial stocks can be a great way to diversify your portfolio and add companies that play a crucial role in our economy. With that said, they can be very sensitive to changes in the economy. That’s why it’s important to buy companies with strong financial positions so that they can handle any economic downturns without serious problems. The best industrial stocks have a strong balance sheet, low operating costs, and diversified business models. We’ve put together a list of 3 industrial stocks to buy now to help you sort through a sector that could continue showing strength in the coming months.
1. Honeywell
The first stock that investors should consider adding at this time is Honeywell (NYSE:HON), a diversified technology and manufacturing company that is one of the best-run industrials. It operates in four major segments including aerospace, home and building technologies, performance materials, and safety and productivity solutions. This is a name that has held up well during the recent selloff despite its exposure to sectors being negatively impacted by the pandemic including the airline industry. One of the benefits of owning a diversified company like Honeywell is that some of its current sales declines are being offset by its safety and productivity solutions division which is seeing double-digit growth in products like personal protective equipment.
The fact that the stock has rallied over 8% since Honeywell reported a 14% year-over-year decrease in Q3 sales last week is a positive sign. Honeywell’s management is doing a nice job of cutting costs to maintain a decent operating margin and was able to deliver over $450 million in cost savings in Q3. The company has also made some exciting investments into software offerings and quantum computing that could pay off in a big way going forward. Honeywell has a reliable history of dividend increases and currently offers a solid dividend yield of 2.08%.
2. H3M Co
Another blue-chip industrial stock that looks interesting at this time is 3M Company (NYSE:MMM), a global manufacturing company that provides a diverse array of products in manufacturing, industrial, health care, safety, and consumer markets. Like many industrial stocks, 3M has risks when it comes to cyclical end-markets that can be affected during a recession. However, since it is an industrial conglomerate, 3M’s business is diversified enough to minimize those risks. For example, 3M is seeing strong demand for its health care products including the famous N95 mask that it produces. Another strong quality of 3M is its continued investment into research and development which historically has driven sales and profit growth. The company reported R&D expenses of $1.9 billion in 2019 which was 6% of revenue.
As the global economy starts to rebound, 3M’s earnings growth should come back strong as well. Q3 was solid for the company, as it reported sales of $8.4 billion which was a year-over-year increase of 4.5%. This is a sign of strength during a truly challenging period for industrial companies. 3M is also a reliable dividend-paying stock, as it has increased its annual payout for 61 consecutive years. The stock currently offers a 3.56% dividend yield and 3M generated $2.2 billion in Q3 free cash flow, which tells us that the dividend is safe going forward.
3. CSX Corporation
The last stock on our list is CSX Corporation (NASDAQ:CSX), a company that operates the largest freight rail network in the eastern United States. It’s a business that provides a critical service for the overall economy and has a lot of potential once we start to see a full economic recovery. While COVID-19 caused U.S. rail volume to drop 19% year-over-year in Q2, things are already rebounding sharply thanks to states reopening. CSX even saw record volume increases in Q2 as it provided cost-efficient deliveries of raw materials and finished goods across the country.
This is a business with a strong competitive advantage, thanks to high barriers of entry for newcomers since laying down thousands of miles of railroad tracks is an extremely capital intensive activity. Other things to like about CSX are the company’s history of share buybacks and its history of dividend growth. CSX announced a new share repurchase program of $5 billion on Oct 21st which could lead to upside for the stock. While railroad stocks can be volatile, this is one of the best ones to own for the long-term.
Final Thoughts
Industrial stocks haven’t been as hot as other sectors this year, but the good news is that we are starting to see money flow into the sector. Most of the time, you can’t go wrong with buying quality companies that have proven they can handle things well during challenging periods. Consider adding shares of the 3 industrial stocks mentioned above if you are interested in gaining exposure to the sector with superior companies.