With the S&P 500 having slid 19% so far this year, you might be looking for some bargain buys in the stock market.
Morningstar has put together a list of the best stocks to own in various industries. This time around it's focusing this story on the industrial sector.
So how does Morningstar define “best stocks”?
It’s companies with wide moats, which means strong and sustainable edges over their competitors. “We’re confident that they will produce returns that outweigh their costs for the next 20 years or more,” Morningstar says.
“The strength of their competitive advantages is also either steady or increasing, which adds to our confidence in their long-term growth.”
Environmental-social-governance factors also play a role. “The best companies have business models that allow them to effectively navigate evolving ESG issues that could materially impact their business,” Morningstar said.
Other metrics are involved, too. “The companies that make our list have predictable cash flows, so our analysts can more accurately estimate how much the businesses are worth,” Morningstar said. “These companies also make smart decisions about how they manage and invest their money.”
Industrial Companies’ Strength
When it comes to industrial stocks, many of the companies Morningstar chose “benefit from their incumbent position in their industries,” the firm said.
“It allows these businesses to develop brands and patents that give them their edge. Many further benefit from a cost advantage, operating in industries where infrastructure or regulation limitations make it expensive for new competitors to enter the market.”
Morningstar doesn’t recommend that you buy all these stocks now. About half the ones that made its overall list recently traded above the firm’s fair-value estimates.
Here are 10 industrial stocks cited by Morningstar that recently traded beneath Morningstar’s fair value. They are listed in descending order of market capitalization.
- Honeywell (HON), the technology provider
- Raytheon Technologies (RTX), the aerospace giant
- ABB (ABB), the Swiss engineering company
- Emerson Electric (EMR), the industrial group
- Roper Technologies (ROP), a diversified technology company
- TransDigm Group (TDG), an aircraft-component maker
- Experian (EXPGF) , a credit-information bureau
- Rockwell Automation (ROK), the automation and information-services provider
- Equifax (EFX), another credit information bureau
- Rentokil Initial (RTOKY) , a pest-control provider
Honeywell: Morningstar analyst Joshua Aguilar puts fair value for the stock at $235. about 9% above recent trades at $215. “Honeywell is one of the strongest multi-industry firms in operation today,” he wrote in a commentary.
That stems largely from “increased demand for warehouse automation solutions and new digital offerings that promote data analytics in powerplants, remote security management and energy savings in building solutions.”
Raytheon: Morningstar analyst Nicholas Owens puts fair value for the stock at $106. It recently traded at $100.
He raised the estimate from $96 in November to “reflect the firm's steady progress toward ambitious post-[United Technologies] merger goals, notwithstanding its share of widespread supply chain troubles.”
Owens cited “in particular the firm's fairly aggressive delevering of its balance sheet and promising signs of increased after-market revenue.”
The author of this story owns shares of Honeywell.
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