In this article, we will be taking a look at the 14 best industrial stocks to buy according to hedge funds. To skip our analysis of the industrials sector, you can go directly to see the 5 Best Industrial Stocks to Buy According to Hedge Funds.
According to McKinsey, key players in the industrials sector have generated value by emphasizing product margin optimization and engaging in mergers and acquisitions (M&A) during the last two decades. The success of these strategies can be gauged by the fact that from 2014-2019, the return on capital employed (ROCE) of the sector rose 13%, surpassing the usual sector-level weighted average cost of capital, which typically ranges from 8% to 10%. Furthermore, the yearly shareholder returns of the industrials sector recorded a growth of approximately 400 basis points in comparison to the last 15 years. While industrial enterprises were able to recover strongly from the recessionary period post-pandemic, they now face a difficult operating environment characterized by significant changes in customer buying patterns, labour market dynamics, and the international supply chain network.
Moving into 2023, the industrials sector is expected to face similar concerns to other industries, particularly rising inflationary pressures and the heightened risk of a recession in the United States or globally. However, according to Fidelity Investments, for investors with a long-term perspective, there are three noteworthy trends within the sector that present opportunities for industrial companies based in the US. These trends include digital transformation, a growing emphasis on sustainability, and a shift towards domestic production as opposed to relying on extensive global supply chains. The growing focus on sustainability is resulting in industrial companies venturing into new avenues concerning green products and services. As per McKinsey, the value of sustainable solutions has already demonstrated its significance. For instance, the complete sustainability value chain of transport has the potential to reach a valuation of $2.3 trillion to $2.7 trillion by 2030. Investors are further projected to invest an additional $4 trillion towards the development of new decarbonization ventures by 2025.
Furthermore, the industrials sector is also expected to benefit from the increased spending on national infrastructure following the pandemic. To aid the economy’s recovery, in November 2021, legislators approved a substantial $1.2 trillion infrastructure bill, which is expected to generate a significant increase in sales for industrial companies involved in providing construction equipment and services in the coming years. The bill includes funding for various sub-sectors in the industry, including road and rail transportation, electrical equipment, aerospace, and industrial machinery. Keeping in view the aforementioned trends and developments, notable companies in the sector, such as TransDigm Group Incorporated (NYSE:TDG), Union Pacific Corporation (NYSE:UNP) and General Electric Company (NYSE:GE), have been investing in advanced technologies and expanding their provision of services to cash on the pent-up demand. This has also resulted in higher profitability for companies like Transdigm Group Incorporated, as evident by their latest earnings call for Q1 2023:
Our Q1 results show positive growth in comparison to the same prior year period. We are encouraged by the progression of the commercial aerospace market recovery to date, and trends in the commercial aerospace market remain favorable as demand for travel remains robust. In our business, we saw another quarter of very healthy growth in our total commercial revenues and bookings. Bookings also outpaced revenues in all 3 of our major market channels, commercial OEM, commercial aftermarket and defense. We also attained an EBITDA as defined margin of 50% in the quarter. Contributing to the strong margin is the continued recovery in our commercial aftermarket revenues, along with diligent focus on our operating strategy. Additionally, we had strong operating cash flow generation in Q1 of almost $380 million and ended the quarter with close to $3.3 billion of cash. We expect to steadily generate significant additional cash throughout the remainder of 2023. Next, an update on our capital allocation activities and priorities. The capital allocation priorities at TransDigm are unchanged. Our first priority is to reinvest in our businesses; second, to do accretive M&A; and third, return capital to our shareholders via share buybacks or dividends. A fourth option paying down debt seems unlikely at this time, though we do still take this into consideration. We are continually evaluating all of our capital allocation options. As mentioned earlier, we ended the quarter with a sizable cash balance of close to $3.3 billion, which leaves us with significant liquidity and financial flexibility to meet any likely range of capital requirements or other opportunities in the readily foreseeable future. Regarding the current M&A pipeline, we are actively looking for M&A opportunities that fit our model. Click here to read the full earnings call transcript.
With this context in mind, let’s take a look at the 14 best industrial stocks to buy according to hedge funds.
14 Best Industrial Stocks to Buy According to Hedge Funds
Our Methodology
We used Insider Monkey’s database of 943 elite funds to select the 14 best industrial stocks with the highest number of hedge fund investors as of Q1 2023. The stocks have been ranked in ascending order of the hedge fund ownership.
Best Industrial Stocks to Buy According to Hedge Funds
Raytheon Technologies Corporation (NYSE:RTX) is a Virginia-United Stated-based aerospace and defence company. The company offers advanced solutions to government, military, and commercial customers.
Raytheon Technologies Corporation (NYSE:RTX) is amongst the largest aerospace and defence providers in the world in terms of market capitalization and revenue. On May 25, Raytheon Technologies Corporation (NYSE:RTX) was granted a contract valued at $619 million by the Office of Naval Research. The contract aims to facilitate the development of new hardware for the United States Navy’s Family of Radars.
Here’s what Carillon Tower Advisers said about Raytheon Technologies Corporation (NYSE:RTX) in its Q3 2022 investor letter:
“Raytheon Technologies Corporation (NYSE:RTX) announced strong results led by strength in its commercial segment, but weakness in its defense business led to investor consternation. Management guided to a recovery in this segment, citing both transitory supply chain issues and continued strong demand.”
Parker-Hannifin Corporation (NYSE:PH) specializes in providing motion and control technologies for various markets, ranging from mobile to industrial and aerospace.
The company posted strong Q3 2023 results, with quarterly sales reaching $5.1 billion. This reflected an increase of 24% from the same period last year. Furthermore, Parker-Hannifin Corporation (NYSE:PH) announced an 11% year-on-year (YoY) increase in its quarterly dividend. The stock’s annual forward dividend yield stands at 1.84% as of May 25.
Harris Associates was the leading hedge fund investor in Parker-Hannifin Corporation (NYSE:PH) during Q1 2023, with a stake worth over $892 million.
3M Company (NYSE:MMM) is engaged in the production of safety, industrial, and consumer products.
In Q1 2023, 3M Company (NYSE:MMM) reported an adjusted free cash flow of approximately $950 million, reflecting a YoY increase of 24%. The company attributed the improvement to reduced yearly incentive cash compensation and efficient working capital management. Furthermore, 3M Company (NYSE:MMM) also revealed that the company had managed to reduce its inventory levels by $500 million since August last year.
Overall, 51 hedge funds held a stake in 3M Company (NYSE:MMM) during Q1 2023.
Caterpillar Inc. (NYSE:CAT) is a Texas, United States-based producer of construction equipment and related machinery.
On May 9, David Raso at Evercore ISI gave Caterpillar Inc. (NYSE:CAT) stock a price target of $263 and assigned an Outperformed rating. On average, the company raised its EPS estimates for FY 2023 by 5% to 7%, post the Q1 earnings season.
“In the case of Caterpillar Inc. (NYSE:CAT), the company reported a better-than-expected Q3 as demand in mining, non-residential construction and energy remained healthy through the year even as recession fears grew. Caterpillar showed strong pricing power and operating efficiency in the face of supply chain constraints and labor shortages, which in turn contributed to better-than-expected share price performance.”
The Boeing Company (NYSE:BA) is an established American multinational corporation engaged in the design, manufacturing, and sale of various aerospace products.
Two Sigma Advisors raised its stake in The Boeing Company (NYSE:BA) by over 1000% during the first quarter of the year. Of the 943 hedge funds being tracked by Insider Monkey at the end of Q1 2023, The Boeing Company (NYSE:BA) was held by 52 hedge funds.
FedEx Corporation (NYSE:FDX) is primarily involved in the provision of transportation, e-commerce, and business services.
The number of hedge funds having a stake in FedEx Corporation (NYSE:FDX) increased from 48 in Q4 2022 to 55 in Q1 2023. Citadel Investment Group was the leading hedge fund investor in the company, with a stake worth over $467 million during the first quarter of the year.
Artisan Partners shared its outlook on FedEx Corporation (NYSE:FDX) in its Q1 2023 investor letter. Here’s what the firm said:
“After bottoming in September 2022 at less than 8X our estimate of normalized earnings, shares of FedEx Corporation (NYSE:FDX), a global shipping and logistics firm, have rallied strongly over the past six months. The demand environment remains challenging, particularly in the Express segment due to lower volumes in Asia and Europe. A key question remains how much the demand slowdown is idiosyncratic due to the post-pandemic reopening of the international economy and therefore less likely to repeat and how much is due to a cyclical slowdown. Due to the substantial pessimism already priced into shares, it hasn’t taken much for shares to rise soundly. Better-than-expected operating results and progress on cost-cutting initiatives, including additional headcount reductions, to offset cost pressures were well-received. While operating results can be choppy, FedEx’s longer term business economics are highly favorable given the global shipping industry’s consolidated structure and massive barriers to entry that afford operators with pricing power to counter cost inflation and earn respectable returns on capital over the business cycle.”
Eaton Corporation plc (NYSE:ETN) is a power management company with a rich history of over 100 years. The company is headquartered in Dublin, Ireland.
In Q1 2023, Eaton Corporation plc (NYSE:ETN) posted an EPS of $1.88, up 16% from the same period last year. Furthermore, the company recorded sales of $5.5 billion, reflecting a quarterly increase of 15% organically. Eaton Corporation plc (NYSE:ETN) offers an annual forward dividend yield of 1.94% as of May 25. The company’s strong business fundamentals make it one of the best industrial stocks to buy, according to hedge funds.
Honeywell International Inc. (NASDAQ:HON) is a Charlotte, North Carolina-based company involved in various businesses such as building technologies, aerospace, and productivity solutions.
On May 2, John Eade at Argus gave Honeywell International Inc. (NASDAQ:HON) a Buy rating with a price target of $230. The analyst thinks this is an ideal opportunity to build a position in one of the best industrial stocks in the market, as the company has a strong balance sheet and a history of outperforming its targets.
As of Q1 2023, 58 hedge funds reported owning a stake in Honeywell International Inc. (NASDAQ:HON), up from 44 in the previous quarter.
Lockheed Martin Corporation (NYSE:LMT) has a global presence in the aerospace, defence, technology, and information security sectors.
On May 18, Lockheed Martin Corporation (NYSE:LMT) announced that it had been granted a firm-fixed-price contract valued at $750.55 million. The contract relates to Lot 21 Joint Air-to-Surface Standoff Missile B-2 missiles and includes containers, tooling and test equipment, as well as spares.
Here’s what Vltava Fund said about Lockheed Martin Corporation (NYSE:LMT) in its Q3 2022 investor letter:
“LMT is one of the world’s largest aerospace and defence companies. The war in Ukraine has reminded investors and the wider public just how important these companies are. The aerospace and defence industry in the USA is an established oligopoly. This means that a few large firms play a dominant role. While collectively they comprise an oligopoly, individually they often have monopoly positions in particular narrower segments. Their main counterparty is the US government, a key customer in what is known as a monopsonist position. This is a rather unusual situation, but one that is very advantageous for companies such as LMT.
In addition to Lockheed Martin Corporation (NYSE:LMT), stocks such as TransDigm Group Incorporated (NYSE:TDG), Union Pacific Corporation (NYSE:UNP) and General Electric Company (NYSE:GE) are also amongst the best industrial stocks to buy according to hedge funds.