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5 Industrial Stocks Funds Love for 2012 - views
BALTIMORE (Stockpickr) -- Industrial stocks aren’t exactly the sexiest names on the market. More often than not, they’re big and lumbering, they have extremely cyclical businesses, and those businesses are usually boring. But that’s exactly why funds have been buying industrial stocks with both hands in the last few months.
Even though industrials don’t have the obvious excitement that you’d find in an IPO name or a hot tech play, these stocks are still pretty exciting performance-wise. As a sector, they’ve rallied 21.2% in the last six months, beating the S&P 500 by 6.4% over that same period.
A lot of that success has to do with the anxiety in the marketplace right now. As investors look for ways to shake off risk, the relatively staid businesses (and dividend payouts) of industrials look like a pretty good way to participate in the rally we’ve gotten. That’s why the sector was one of only three that funds increased their positions in during the final quarter of 2012.
That’s not to say that all industrial stocks are created equal. Today, we’re taking a look at the stocks in this sector that funds love right now.
To do that, we're focusing on 13F filings. Institutional investors with more than $100 million in assets are required to file a 13F -- a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F.
In total, 3,238 firms filed the form for the fourth quarter of 2011, and by comparing one quarter's filing to another, we can see how any single fund manager is moving their portfolio around – and what their favorite stocks are for the months ahead.
Today, we’ll focus on five institutional favorites in the industrial sector.
For better or worse, General Electric (GE) is your prototypical industrial name. The firm is involved in a bevy of heavy manufacturing segments, from making jet engines to wind turbines and medical equipment.
It was also the most heavily bought industrial stock in the final quarter of 2011 -- institutional investors picked up 76 million shares in the quarter, adding onto a massive position in the firm. For example, Bridgewater Associates increased its position in the stock by 18.8%, to 1.11 million shares, while Mairs & Power scooped up an additional 21,560 shares. GE is also one of Warren Buffett's stocks.
GE’s businesses look disparate at first, but in reality, the firm is able make the puzzle pieces fit together and share technologies and customers across business lines. The wind turbine business, for instance, can benefit from the advances that the firm is making in the jet engine business -- and the firm can make money by financing all of those customers through its GE Capital arm.
The financial services unit was a black eye for GE just a few years ago as the economy got shaky; while most of the concerns about GE capital have abated, the financing business still makes up a very large part of GE’s overall business. That’s something buyers should keep in mind when they take on positions in GE.
Financially, this firm is in strong shape. While industrial manufacturing is a capital-intense business, GE carries significant cash reserves -- plenty to cover its 3.47% dividend yield (it's one of the top-yielding industrial stocks). Investors looking for industrial exposure in 2012 could do worse than this blue-chip.
From GE, and onto one of GE’s major partners: Boeing (BA). Last quarter, funds picked up 9.72 million shares of Boeing, adding onto their $39 billion position in the firm. That share addition makes Boeing the second-most-bought industrial name in the fourth quarter.
Boeing is a $55 billion aerospace company that targets the commercial aviation and defense markets. As black clouds form over defense contractors, Boeing is benefitting from the increased impetus on more efficient airliners. After long delays, the firm’s 787 entered commercial service in October, offering airlines a 20% reduction in fuel consumption from the similarly sized 767. And new engine systems on the popular 737 offer carriers better efficiency on a familiar platform.
With rising oil prices weighing on airlines’ profitability, Boeing should have a strong tailwind at its back this year.
That’s not to say that Boeing is bowing out of the defense business. The firm holds lucrative contracts right now, including one to replace nearly half of the Air Force’s aging refueling tanker fleet. Boeing’s mission-critical contracts should keep it more immune to defense budget cuts than most.
Boeing, one of the top-yielding aerospace and defense stocks, shows up on a list of JPMorgan's 24 Stocks That Are More Attractive Than Apple.
Caterpillar (CAT) is having a great year in 2012 (it shows up on a recent list of the 5 Best-Performing Dow Stocks in 2012). Since the first trading day of the new year, shares have rallied by more than 25%, more than doubling the S&P’s performance over that same period.
That’s been a very good thing for fund managers; institutions picked up 1.65 million shares of Caterpillar last quarter, making it the third-most bought industrial stock of Q4. One buyer was Fortress Investment Group, which initiated a new 38,000-share position in the stock.
CAT is the biggest heavy equipment manufacturer in the world, serving the agriculture, mining, and construction industries with tractors, combines, backhoes, excavators and the like. The firm boasts an absolutely massive dealership network that spans the globe -- and as a result, CAT’s primed to take advantage of demand in emerging markets like China and India.
While competition is strong in the heavy equipment business, Caterpillar boasts one of the strongest brands out there and the wherewithal to support massive R&D spending to keep it ahead of peers.
Thanks to a massive installed base, CAT is also able to generate significant service revenues. Today, those high-margin service calls make up almost half of the firm’s sales; as the Caterpillar equipment worldwide ages, the firm should be able to take home consistent service fees to keep those machines working. Until owners are ready to upgrade to a new CAT model, that is.
This is another name that has strong tailwinds at play in 2012. With the firm’s credit arm holding up pretty well during the recession, investors will be more apt to give CAT the benefit of the doubt during the next economic pullback.
Caterpillar also shows up on a list of 5 Stocks to Saely Make Money in Emerging Markets.
With a hand in everything from aerospace to automation to security systems, Honeywell (HON) is one of the more diversified names on our list of funds’ favorite industrials. While too much transportation exposure was a drag on earnings during the recession, the firm has managed to improve its operations in the years since, increasing margins and climbing revenues back up to pre-recession highs this year.
Honeywell is the league leader in the general aviation and regional jet avionics business, leaving outfitting larger commercial aircraft to the likes of GE. By focusing on a single niche, the firm ensures that its avionics systems are more tailored to smaller aircraft, and that pilots are more familiar with Honeywell’s systems. Both of those factors should help to drive demand in the years ahead.
Even though Honeywell’s growth-by-acquisition strategy hasn’t been a cheap way to expand the top line, debt remains manageable and the firm has a long track record of paying down debt balances.
United Parcel Service
United Parcel Service (UPS) is a bit different from the other names that made funds’ “buy lists” during the fourth quarter. While the other names we’ve looked at have been industrial manufacturers, this firm is a service stock.
Still, major industrial exposure means that UPS still tips the scales as one of the biggest industrials funds’ bought last quarter. With 5.7 million shares added to institutional portfolios, this firm tips the scales in fifth place. (Buyers included Mairs & Power, and it's also one of Buffett's holdings.)
UPS is the world’s largest package delivery company, a distinction that gives this stock a massive economic moat that few rivals can compete with. UPS operates in a duopoly with FedEx (FDX) domestically, and with just a couple of added names abroad. With 500 planes and more than 100,000 vehicles in its fleet, it’s no surprise why the field is so limited -- it takes an absolutely massive capital investment to even attempt the sort of reach that UPS has. And in the package delivery business, reach is everything.
Rising fuel costs are a double edged sword for UPS: While they increase one of the firm’s biggest costs, they also help to drive logistics revenues from clients looking for more efficient ways to transport freight. The firm’s scale and completely integrated network mean that margins shouldn’t suffer too much from oil prices in the near-term.
Meanwhile, the firm’s positioning on the front-end of the business cycle means that it will continue to be early to benefit from improvements in the economy this year.
Coattail investors looking for industrial service exposure -- and a 2.91% dividend yield -- should take a look at UPS.
To see these stocks in action, check out the Funds’ Favorite Industrial Buys portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
At the time of publication, author had no positions in stocks mentioned.
Jonas Elmerraji, based out of Baltimore, is the editor and portfolio manager of the Rhino Stock Report, a free investment advisory that returned 15% in 2008. He is a contributor to numerous financial outlets, including Forbes and Investopedia, and has been featured in Investor's Business Daily, in Consumer's Digest and on MSNBC.com.