If you're convinced that the American economy is going to take off, whether that's today or somewhere down the road, you might consider taking a gander at industrial stocks.
Few sectors are more widely dispersed – industrial stocks cover everything, from railroad operators to tractor makers to jet-engine designers, and so, so much more in between. But industrials generally share at least one common thread: They're among the companies most sensitive to economic conditions … for better and for worse.
Today, we're going to shine a light on industrial stocks. We'll start by providing you a clearer picture of what the industry entails, explaining why investors get excited about the sector, and then show you how to find the best industrial stocks to buy.
What are industrial stocks?
Industrial stocks are among the most difficult sectors to pin down because the companies within are so varied.
An airline is one example of an industrial company. The manufacturer responsible for the airline's planes would be another. The firm that designs the plane's jet engines would be yet another. So too would the maker of the tools used in crafting those engines. Even the company that serviced all of those other companies' printers would probably fall within the industrial umbrella.
When defining sectors, we typically look to the Global Industry Classification Standard (GICS), a framework used by major index providers to help classify public companies. And when it comes to industrials … well, this one's a mouthful. Says the GICS:
"The Industrials Sector includes manufacturers and distributors of capital goods such as aerospace & defense, building products, electrical equipment and machinery and companies that offer construction & engineering services. It also includes providers of commercial & professional services including printing, environmental and facilities services, office services & supplies, security & alarm services, human resource & employment services, research & consulting services. It also includes companies that provide transportation services."
Why do investors buy industrial stocks?
Investment choices are sliced and diced in a variety of ways – for example, value stocks vs growth stocks, or large caps vs mid- and small caps.
You can also divide investments into "defense" and "offense."
Defense: Can deliver portfolio stability, as well as reduced downside and even modest upside in down markets.
Offense: Can produce portfolio outperformance when the economy is humming along and the broader market is on the rise.
Industrials are usually in the latter camp – but not always.
For instance, if the U.S. economy is growing at a healthy clip, governments and corporations alike will typically ramp up capital investments, which is good news for companies such as heavy machinery manufacturers or construction firms … of course, if the economy slows, contracts might dry up, and projects might get pushed back.
But your local trash collector? Well, their business is a little more consistent and insulated from external market factors – trash needs to be picked up, roaring economy or not.
That said, when economic conditions change or the country faces a potentially seismic shift in policy – say, oh, I don't know, after an election that handed one party control of both the White House and Congress – Wall Street's gaze tends to shift to the more cyclical members of the industrial sector.
"One other theme I've been watching is how policy changes from the incoming administration and Congress could impact the sector," says Fidelity Sector Portfolio Manager David Wagner says in his 2025 outlook. "In many ways, I believe upcoming shifts could be broadly favorable for this sector. Potential deregulation could increase confidence for company managements, their customers and investors alike. Many companies have said recently that their customers are hesitant to make capital investments and place orders. The election outcome may inspire more confidence for these businesses to move forward with their investments."
And while BofA Global Research only has a Market Weight rating on shares, which is the equivalent of Hold, it does point out a number of potential catalysts for 2025, including "picks and shovels" spending being boosted by fiscal stimulus, reshoring, easing pressure from interest rates and a potential manufacturing recovery, among other drivers.
How to find the best industrial stocks to buy
We can't speak for your personal preferences in industrials – you might favor more stable, blue-chip stocks that produce higher-than-average income, or smaller deep-value plays.
But we can help you get a start by providing you with a basic quality screen.
To get to the following list of the best industrial stocks to buy, we've looked for companies …
Within the S&P Composite 1500: This index – a combination of the S&P 500, S&P MidCap 400, and S&P SmallCap 600 – is our typical starting place. This screen allows for stocks of different sizes, but it still represents roughly 90% of America's market capitalization, weeding out the smallest stocks.
With a dividend yield of at least 1.5%: While you can find nice yields in this space, the industrial sector as a whole isn't exactly known for its high dividend yields. Indeed, the sector – using the Industrial Select Sector SPDR ETF (XLI) as a proxy – yields 1.3%, just ahead of the 1.2% paid out by the S&P 500. Here, we're maintaining a 1.5% yield floor so we get at least a little more income than the market and your average industrial stock. (But if you're more interested in growth stocks, you could delete the yield requirement from your own screen.)
With a price/earnings-to-growth (PEG) ratio of under 2: PEG ratios are centered around 1.0 – anything less than 1.0 is considered undervalued, while anything more than 1.0 is considered overvalued. To wit, the S&P 500 is trading at a PEG of 1.25 right now, so the market as a whole is a little pricey. We're extending our search to allow for a PEG of as high as 2.0, as some of the growthier names in the space might warrant an additional premium, though many of the stocks in our screen don't come close to that number – and, in fact, some currently trade in value territory.
With a long-term estimated earnings-per-share growth rate of at least 6%: We generally expect industrials' earnings to improve in tandem with economic expansion. However, given differing industry cycles, it's possible some of these companies might experience their own ups and downs. So what we'd like to see is that, even once they've accounted for those potential ups and downs, analysts still anticipate at least a modest growth rate – if not downright aggressive expansion. (Just remember: Expectations don't guarantee results.)
With at least five covering analysts: We'd like to look at stocks that are on Wall Street analysts' radar, which makes it likelier that there's both more reporting and more insights on these companies. The more research we have at our disposal, the more educated a decision we can make.
With a consensus Buy rating: All of the names on our list of the best stocks to buy in the industrial sector must have an average broker recommendation of 2.5 or less within S&P Global Market Intelligence's ratings scale. S&P Global Market Intelligence converts analysts' ratings into a numerical scale. Anything with a score of 2.5 or less is considered a Buy.
