2 cheap industrial stocks to buy now and never sell
The financial performance of industrial companies has a history of rising and falling with the economy in general, which makes them cyclical. As you might expect, the stock performance of these companies reacts to financial performance, which means that areas of economic weakness often lead to investment opportunities.
Two manufacturers that seem cheap today are Stanley Black & Decker (SWK -1.05%) and Rockwell Automation (ROK -2.32%). Here’s what you need to know about these two stocks.
1. Stanley Black & Decker: The problem with short cycle products
Stanley Black & Decker is best known for the tools it makes and sells. This business is strongly tied to consumers, with around 30% of the company’s sales coming from just two major hardware stores in 2021. Manufacturing consumer-grade tools isn’t the only thing it does by far, because it also makes high quality products. technical fasteners, but tools are a much bigger business. So when consumers are in a funk, Stanley Black & Decker sales can quickly run out of steam. So far this year, it has lowered its adjusted annual earnings forecast from $12 to $12.50 per share to a range of just $5 to $6 per share.
The fact is that consumers tend to change their buying habits faster than businesses, which is why Stanley Black & Decker is said to be more exposed to short cycles. When things start to improve, the company will likely benefit faster than many of its industry peers. So the roughly 50% drop in the stock so far in 2022 is likely a buying opportunity for long-term investors.
To be fair, the company has a lot of work to do, so the stock price could drop further before recovering. But it’s better to be about right than to miss the opportunity to wait for the perfect entry point. Still, you’ll want to monitor how management is handling supply chain issues, fighting inflation, and pushing through price increases. All are going to be vital as he looks to restore margins and improve profits. If history is any guide, management will pull through, and in the meantime, you can see a historically generous dividend yield of 3.5%.
2. Rockwell Automation: still in high demand
Rockwell Automation is a more typical industrial company, selling products and services directly to other companies. As the name suggests, it helps other businesses automate their business. It is usually, by its nature, a money-saving effort, which means that economic downturns are negative for the business in a sense, but also a business opportunity, as potential customers pass in cost-cutting mode. Rockwell Automation stock is down about 25% so far in 2022.
But there are two different things taking shape right now. For one thing, Rockwell Automation is seeing pretty strong demand. In fact, in the fiscal third quarter earnings release, management pointed out that its backlog of work to be performed was at historically high levels. This suggests that business is very strong. But, at the same time, management faces significant supply chain issues. This limits its ability to complete work and hinders sales and revenue.
And yet, even though the company has cut its fiscal 2022 sales forecast, it still expects to see a year-over-year increase of between 10.5% and 12.5%. It’s a little less than expected, but it’s hard to complain. Adjusted earnings per share, meanwhile, were $9.43 in fiscal 2021 and are now expected to fall between $9.30 and $9.70 in 2022. This is not a business which suddenly collapses so badly that investors should run for the hills.
If history is any guide, Rockwell Automation will competently handle today’s headwinds. And you can perceive its modest yield of 1.75% while you wait. Don’t get too caught up in that small dividend yield, though; the dividend has increased by an impressive 10% per year, on average, over the past decade.
The key with Rockwell Automation and Stanley Black & Decker is that investors currently have the opportunity to buy strong, historically well-run companies after massive sell-offs. If you buy and hold, perhaps for the rest of your life, chances are you’ll end up with a pair of winners here.