3 Fundamentally Strong Capital Goods Stocks

By Aryeh Katz | November 03, 2010 AAA

These days, while most of the business media attention is centered around the precious metals and technology sectors, there are other market niches that are looking attractive. The capital goods sector is one of them. In fact, this group may be one of the least sexy and most often overlooked corners of the investment universe, mostly because many folks aren't sure of what's included under the capital goods title. In a nutshell, the sector is comprised of companies doing business in aerospace and defense, construction, industrial machinery, and engineering and building products.

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Below we highlight three capital goods producers that have recently been flashing very strong fundamentals. From the aspect of dividend yield, P/E ratio, price to book and price to sales ratios, this trio leads the pack.

Irish Tumbler
CRH PLC (NYSE:CRH) is headquartered in Dublin, Ireland and operates a diversified building materials business. CRH stock has fallen significantly this year, down more than 35% since New Year's. That compares very poorly with the rest of the sector as represented by the Vanguard Industrials ETF (NYSE:VIS), which is up nearly 17% YTD and the broad market, as represented by the SPDR Dow Jones Industrial Average ETF (NYSE:DIA). In late August, the company was hit by a downgrade from Merrill Lynch, from a buy rating to neutral.

Nonetheless, CRH may now be the ideal choice for value investors should the global growth story continue or we see more infrastructure stimulus programs in the face of stagnant growth. CRH trades with a dividend yield of 2.7 % and sports a P/E of 16.6. The price to book on the stock is 0.87 and price to sales 0.54, both attractive value numbers.

Steel Rail Value
Harsco Corporation (NYSE:HSC) is a diversified provider of engineered products and industrial services, best known for its manufacture of products for the rail industry. Year to date, the company's shares are also down 28%. But like CRH, the fundamentals indicate a potential turnaround play. P/E on HSC is 18.5 and the yield is 3.5%. price to book and price to sales are 1.24 and 0.61 respectively.

War Profiteer
Northrop Grumman Corporation (NYSE:NOC) is a security-based business involved in producing everything from submarines and aircrafts to satellites and electronic intelligence systems. The company's stock has performed well YTD, up 15.5%. The shares yield slightly less than 3% and trade with a multiple of 10 times last year's earnings. (High-dividend stocks make excellent bear market investments, but the payouts aren't a sure thing. Check out Dividend Yield For The Downturn.)

NOC has very competitive P/B and P/S valuations, as well, the former coming in at 1.40 while the latter sits at 0.54.

The Wrap
The capital goods sector won't be manufacturing anything you find at the mall, but investors should be aware of the potential for these stocks to fly should the current stagnant economic situation begin to ease.

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