6 Stocks To Outperform On Late Cycle Growth

Both the bull market and the U.S. economic expansion are aging, but Nigel Coe, an industrial sector analyst with Wolfe Research, sees continued upside potential in this segment of the market. He's betting on a reduction of trade tensions, and has issued outperform ratings on several industrial stocks that he indicates are well-positioned to thrive late in the U.S. economic cycle, according to a research note cited by Barron's. These stocks include:

Stock Ticker 5-Year Gain
Emerson Electric Co. EMR 48%
Fortive Corp. FTV 55% *
Honeywell International Inc. HON 105%
Ingersoll-Rand PLC IR 120%
Regal Beloit Corp. RBC 33%
United Technologies Corp. UTX 48%
S&P 500 Index SPX 68%

Sources: Barron's; gains per Yahoo Finance computed through the open on July 2 based on adjusted close data from July 2, 2013. (*Gain calculated from Fortive's opening price on July 5, 2016, its first day of regular way trading.)

Huge Upside Potential

To be sure, Coe acknowledges that investors may be taking some significant risks in following his recommendations, especially in light of the fact that the sector's forward P/E ratio of about 16.5 times earnings may not account for the possibility of a full trade war. That downside is offset by the Federal Reserve. Even though the Fed has been raising interest rates to keep inflation in check, Coe believes that its policy is still sufficiently loose to support further economic growth. Meanwhile, Goldman Sachs projects that U.S. economic growth will remain strong and above trend through the end of 2019. Goldman has issued its own recommendation of cyclical stocks, including those in the industrial sector. (For more, see also: 5 Stock Sectors Poised To Outperformed: Goldman.)


Honeywell is a highly diversified industrial products company supplying advanced components used in a wide variety of applications, including automotive, aerospace, energy exploration, refining, mining, communications and buildings, among others. Per Yahoo Finance, the company has a forward P/E of 16.4 and a forward dividend yield of 2.1%. The consensus estimates among analysts call for 7% year-over-year (YOY) sales growth and 12% EPS growth for the quarter that ended in June 2018. Full year revenue growth is expected to be 6% in 2018 and 4% in 2019, with EPS growth for these years projected to be 13% and 10%, respectively. Honeywell is also among Goldman's recommendations.

United Technologies

United Technologies is an industrial conglomerate whose best-known products include Otis elevators, Carrier air conditioning systems, and Pratt & Whitney jet engines. Per Yahoo Finance, the forward P/E is 15.9, and the forward dividend yield is 2.2%. For the quarter that ended in June 2018, consensus estimates project 7% sales growth, but a slight EPS decline of less than 1%. For full year 2018 and 2019, the revenue forecasts imply 7% and 5% growth, respectively, while the estimated EPS increases are 7% and 10%.

Stocks To Sell

Coe also has issued underweight ratings on several industrial stocks, including 3M Co. (MMM), Illinois Tool Works Inc. (ITW) and Fastenel Co. (FAST). Barron's did not indicate why Coe dislikes these companies. Nonetheless, the biggest losers year-to-date in the Dow Jones Industrial Average (DJIA) include 3M, which has lowered its earnings guidance for 2018 and which is at high risk for a big sales hit from trade wars, since about 60% of its revenue comes from abroad, according to Investor's Business Daily.

Both 3M and ITW, meanwhile, have been facing increasing production costs, partly due to President Trump's tariffs on imported steel and aluminum. Fastenal is in a similar predicament, per another report in Investor's Business Daily. (For more, see also: U.S. Industrial Shares Falter on Cost and Trade Worries.)

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