Industrial stocks have outperformed the overall market since last year, as investors increasingly turn toward value stocks.
The S&P 500 Industrials index has posted a total return of 3.99% over the past year, compared to a 4.35% negative return for the S&P 500 overall.
But even after the sector’s advance, Morningstar analysts still see some stocks in it as substantially undervalued.
Here are Morningstar’s top undervalued industrial stock picks in alphabetical order.
FedEx (FDX), the delivery giant: Morningstar analyst Matthew Young assigns the company a narrow moat (durable competitive advantage) and puts fair value for the stock at $217. It recently traded at $186.
“FedEx is the largest U.S. less-than-truckload carrier, which helps forge sticky relationships with retail and industrial shippers on the package side,” Young wrote in a commentary.
“Rival UPS (UPS) has been around much longer in the U.S. ground market, forging a density advantage and higher margins. But FedEx has gradually enhanced its ground positioning over the past decade, with help from its speed advantage over UPS and capacity investment.
Further, “FedEx's extensive international shipping network is extraordinarily difficult to duplicate,” Young said. “And despite near-term normalization off pandemic highs, domestic/international e-commerce spending should remain a longer-term tailwind.”
Fortune Brand Innovations FBIN, which provides home and security products, such as Moen plumbing fixtures. Morningstar analyst Brian Bernard gives the company a narrow moat and puts fair value for the stock at $78. It recently traded at $62.
Fortune’s “improved financial performance [over the past decade] has been the result of a successful operating strategy,” he wrote in a commentary. That strategy includes “strengthening new home construction and repair and remodel spending.”
Housing construction boomed in 2020-21 and held up for much of last year, Bernard said. “However, deteriorating affordability has slowed housing demand, and we project starts to decrease 18% in 2023,” he said.
Still, “we expect improving affordability (due to both lower mortgage rates and home prices) will cause new housing demand to begin to rebound in 2024, with starts increasing 8%.”
Southwest Airlines (LUV). Bernard assigns the company no moat and puts fair value for the stock at $55. It recently traded at $35.60.
“Southwest reported a fourth-quarter net loss due to costs related to the firm’s widespread operational issues that caused over 16,700 flight cancellations in late December,” he wrote in a commentary. “Furthermore, management noted that the firm will likely realize another net loss during its first quarter.”
Still, “we expect Southwest will begin wholeheartedly addressing operational issues in 2023, and we see the airline benefiting from continued favorable industrywide fundamentals,” Bernard said.
“Management has maintained its 2023 capacity expansion plans” and says that “booking trends have seen a sequential improvement this month [January],” Bernard said.
It also holds that “March is shaping up to be a strong month for both leisure and business travel,” he said.
