Industrial stocks in the S&P 500 are trailing the broad market substantially this year, but they don’t deserve it. As Barron’s Ben Levisohn tells us in this weekend’s Barron’s, industrials may be about to hit their stride in the second half of the year:
With questions about economic expansion rampant, the sector dropped 1.4% during the past two weeks, and its 3.3% rise this year has trailed the S&P 500’s by nearly three percentage points.
But with the first quarter in the rearview mirror, it could be time for industrial companies to make their move—especially those that get a majority of their revenue from the U.S., says BMO Capital Market strategist Brian Belski.
For starters, those companies, which include L-3 Communications Holdings (ticker: LLL), CSX (CSX), and Parker-Hannifin (PH), trade at just 14.7 times forward earnings, well below their average of 16.7 times. At the same time, he notes that analysts now expect domestically focused industrials’ profits to climb 7.5% in 2014, up from 5.7% at the beginning of the year.
It’s actually kind of a mystery why these stocks haven’t been better so far this year. After all, industrial production is absolutely booming right now – we’re in new record-high territory for the index that tracks it. Here’s some data and a crucial chart from Scott Grannis via High Net World Magazine:
“U.S. industrial production in May increased more than expected, and there were upward revisions to prior months.
“Production is up at a 4.6% annualized rate in the six months ending May, and it hasn’t been much stronger in the current recovery. The level of industrial production is now well into new, all-time high territory.”
Josh here – You can even see the Eurozone starting to make the turn higher again. This is big and should be more reflected in the S&P Industrial sector given the below-market valuations for these stocks.