- Not long ago, the growing global economy made for a favorable backdrop for industrial stocks.
- High inflation and the war in Ukraine have made investors nervous about the sector.
- Jefferies says many of the stocks are now cheap and conditions could improve.
It’s a challenging time for industrial companies, to say the least. Global manufacturers now find themselves dealing with high fuel costs, rising prices for key goods, supply chain problems, and a war in Ukraine.
Pointing to the myriad challenges the industrials sector is facing, Jefferies Chief Global Equity Strategist Sean Darby is now “Modestly Bullish” on large cap stocks in the S&P 500 sector instead of “Bullish,” while Jefferies SMID Cap Strategist Steven DeSanctis moved to “Market Weight” from “Overweight” on small-to-mid-cap industrials stocks.
But according to Jefferies, it isn’t time for investors to flee the sector.
“Industrials may outperform if supply chain issues fade and robust demand continues in 2022, although the outlook for everything seems less clear,” wrote a team of Jefferies analysts in a recent report.
Supply chains have been snagged for months, delaying work and causing shortages and higher prices around the globe. The economic recovery from COVID-19 has contributed to big increases in inflation in the US. And war between Ukraine and Russia is affecting both supply chains and inflation, while adding a level of uncertainty that has rattled many investors.
But so far, according to Jefferies, the war in Ukraine isn’t really making those other problems much worse.
“Notably, our companies have not yet reported any further bottlenecks, although input costs are on the rise again,” the firm said.
That leaves “plenty of upside” in a sector that has fallen out of favor at a drastic pace despite a recovery in demand. The sector is down 7.4% year-to-date but is still faring better than the S&P 500, which is down 11.8%.
“Valuations have contracted, providing some buying opportunities across the sector,” Jefferies said. “End-market conditions remain supportive of broad industrial growth and that commodity price inflation is historically positively correlated with industrial stock performance.”
The firm says that conditions are actually favorable and getting better for a slew of industries within the sector: agriculture, thanks to rising crop prices and growing machinery sales; manufacturing, because of strong order data and production; oil and gas, due to climbing prices and growing exploration and production budgets; and residential homes, thanks to rising home sales, prices, and permits.
While investors may be scared off by the issues facing industrials, according to Jefferies those problems aren’t as bad as they seem, and the investors who remain will discover a sector that still has plenty to offer. The following 26 stocks are companies that Jefferies considers buying opportunities in the industrials sector right now.