The industrials sector has been on fire recently.
In the last week, the XLI S&P 500 Industrial Sector SPDR has risen to a new all-time high, and it’s up nearly 27% so far this year.
“I think [this rally is] to be trusted,” said Katie Stockton, founder of Fairlead Strategies. “It’s a little bit early to say, but it looks like the industrial sector is breaking out relative to the broader market after a long-term basing phase so that’s very promising.”
Stocks that have been leading the sector higher include United Technologies (NYSE: UTX), Eaton Corp (NYSE: ETN), and Kansas City Southern (NYSE: KSU), which have hit new all-time highs recently, as well as Caterpillar (NYSE: CAT), UPS (NYSE: UPS), and Rockwell Automation (NYSE: ROK), which have all moved to their highest levels of the year.
“On the individual stock level, we’re seeing a lot of breakouts in absolute terms,” said Stockton. “Some stocks are reaching new all-time highs like UTX, and some are just reaching interim highs like UPS and others. But, to me that tends to exacerbate the momentum behind a move, and I think it can persist.”
Tengler Wealth Management’s Nancy Tengler likes two names in the bunch: UPS and United Technology.
“I think in this space you want to be collecting an above-market dividend yield like you are with UPS and also UTX,” Tengler said. “That way you’re getting paid to wait while these stories work out.”
Both of these stocks offer dividends with a higher yield than the sector as a whole as well as the broader S&P 500, with UTX offering a 2% dividend and UPS offering just over 3%.
“UPS put up great earnings this last quarter – growth in margins to the tune of 150 basis points all the while they were investing in the business,” Tengler said. “So to see the transports lead is bullish for us as investors but also for the overall market, so we’re looking at things like UTX, UPS, Boeing (NYSE: BA), and even 3M (NYSE: MMM) is starting to behave.”
Rockwell Automation is another industrial that offers a dividend at 2%. It had its best one-day gain since April 2009 earlier this week when it jumped 11% after guiding for a strong 2020.
“This industrial looks very good,” said Todd Gordon, founder of TradingAnalysis.com. “I like to look at this from an Elliott Wave point of view, which is a theory that markets advance in trends of threes and corrections of two.”
According to Gordon, the first wave began with a big rally in the two years after January 2009. Shares then consolidated over the following year and then began a multi-year move higher before the stock pulled back last year.
“The theory says we should go up and hit channel resistance,” Gordon said. “We had a massive, massive launch ramp right through the $200 region. We had a breakaway gap. That is now your support if you want to trade it, or in vest in it. I’m looking at adding this to my portfolio. … You will collide with resistance I think above that $250 level so that’s the upside technical resistance.”
Gordon’s $250 resistance target would see the stock rising nearly 26% from the price as of Thursday’s close, and would set a new record high.
While Gordon likes Rockwell Automation, Joule Financial president Quint Tatro has his eye on another stock in the sector.
“Our favorite in the group right now is Eaton Corp,” Tatro said. “When the stock has really been firing on all cylinders, the investment community is willing to pay up to 18 times. We think that can happen here with some multiple expansion. It takes the stock around $106 so we think there’s still some legs.”
While Tatro’s target would see Eaton shares nearly 17% higher from their current level, he says the stock could surge far higher than that if the U.S. and China finally come to an agreement and sign the phase one trade deal.
“It’s only based on current estimates and what we think the confidence is happening here within the investment community,” Tatro added. “If the trade deal does come to fruition and earnings are revised higher, then obviously the stock can go much farther than $106.”