The coronavirus pandemic led to historic government stimulus programs, with the most recent bill this month. The stimulus has so far been a boon to consumer spending, but the best has yet to come for certain stocks…
Like consumers, businesses have also benefited from the stimulus measures. Many companies now have hordes of cash on the books, which is expected to increase capital spending, directly benefitting industrial stocks.
That’s why I am recommending my top three industrial stocks for the month: Deere & Company (DE – Get Rating), Eaton Corporation (ETN – Get Rating), and Cummins Inc. (CMI – Get Rating). But before I get into evaluating those stocks, let’s recap the week.
Stocks were up on Monday, with technology leading the way as interest rates fell. The 10-year Treasury yield dropped to 1.69%, providing a tailwind for equities. Stocks reversed course on Tuesday, with cyclical stocks taking the brunt. Cyclical stocks have been climbing higher due to stimulus measures and an improving economy. The drop was likely a mix of profit-taking and renewed Covid-19 worries.
The market was mixed on Wednesday as the price of oil jumped, and economic data confirmed the strength in the economy. Value stocks were up, while growth stocks underperformed. Tech stocks lagged again on Thursday, with value shares up on a day with high volatility due to quarter-end rebalancing. The market was up again today, with energy stocks benefitting from higher oil prices as the Suez Canal blockage continues.
We all know the market’s latest run is predicated on an improving economy, and the one industry that benefits the most from an improving economy is industrials. Right now, there are many companies not only sitting on a ton of cash but at near-record levels. This is mainly due to the massive stimulus efforts over the past year and companies hoarding cash in a recessionary period.
But we are no longer in a recessionary environment. As the economy reopens, there should be an influx of capital spending (Capex). That money will be spent on infrastructure, and technological upgrades as the Philadelphia Fed’s Future Capital Expenditure indicator is heading close to record highs. This is great news for industrial companies that provide the machinery companies will be buying to upgrade their operations.
That’s why I am highlighting the three companies below.
DE is the world’s leading manufacturer of agricultural equipment. The company has a leading market share in multiple large farm-equipment segments. Its three main areas are Agriculture and Turf, Construction and Forestry, and Credit.
An increase in capital spending should benefit DE’s construction segment. In addition to corporate spending, infrastructure spending in the U.S. is a tailwind for the company. Its agriculture segment will benefit from solid crop demand due to improving demand in China and a tight global supply. There will also be healthy replacement demand for large agriculture equipment as farmers will be incentivized to grow more crops due to higher crop prices.
DE has an overall grade of B, which translates into a Buy Rating in our POWR Ratings system. It also has a Sentiment Grade A, which means analysts love the stock. According to the StockNews Price Target feature, fifteen analysts have a Strong Buy or Buy rating on the stock. We also grade DE based-on Growth, Value, Momentum, Stability, and Quality. You can find those grades here.
DE is ranked #46 in the A-rated Industrial – Machinery industry. You can find other top stocks in that industry by clicking here.
ETN is a diversified power management company operating for over 100 years. The company operates through various segments, including electrical products, electrical systems and services, aerospace, vehicle, and most recently, e-mobility.
In addition to Capex, the company’s sales should see a boost from…
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