Old-Fashioned Profits? Understanding the Industrials Sector
Today, we’re focusing on a sector that was historically even more influential but remains a vital component of the overall market: Industrials.
The many industries of this sector are linked by their role producing goods (and services) used in construction, industry, and manufacturing. While some of this production (like homebuilding, tools, and airlines) is partially consumer-facing, the bulk of revenue in this sector comes from intermediate goods: goods bought by one company to be turned into a final product for consumer sale. Despite this broad similarity, some surprising industries pop up in this catchall sector. Notable industries include:
- Aerospace/Defense: Making up over 25% of the overall sector, this is a unique industry with fortunes largely tied to political decisions on defense spending. Aerospace firms also retain a substantial linkage to consumer sentiments via demand for air travel. But demand for aircraft will vary with airlines’ projections for needs years in advance. Airlines are another, separate industry in the sector.
- Conglomerates: General Electric used to be the poster child for large conglomerates with diverse lines of business (many of which had little to do with industrials). Now, this category is probably best exemplified by 3M (NYSE:MMM).
- Professional Services: Though relatively small, this industry leads some surprising firms, like consumer credit check firm Equifax (NYSE:EFX), to be included with Industrials.
- Road and Rail and Air Freight/Logistics: are both included as separate industries in this sector. Between airlines, truckers, train lines, and air shippers, transportation/logistics stocks easily represent the highest market cap activity in the Industrials sector.
- Machinery: this sector makes heavy machines for used construction, metalworking, agriculture, oil and gas mining, and more. Caterpillar (NYSE:CAT), in the news of late for its heavy exposure to trade conflict, is a prototypical firm. Agricultural equipment giant Deere (NYSE:DE) is another huge player in this space.
We generally think of industrials as a pro-cyclical sector: construction and industrial expansion go on hold during economic downturns. Some think of this sector as “safe and stable,” but the recent troubles the former industrial titan General Electric (NYSE:GE) show that no part of the economy is truly isolated from the winds of change. The increasing drive for energy efficiency is one trend that appears certain to affect the vast majority of industries in this sector. Firms that prove able to adapt their current business models to more rigorous efficiency regulations will be set to thrive. Meanwhile, trade conflict proxies like Boeing and Caterpillar are hardly unique: international sales make up nearly 50% of the total in this sector. The broader health of international commerce will have strong effects on revenue for Industrials.
Ultimately, the Industrials have become one of the most hodgepodge categories under the sectoral analysis system; industry-specific research is essential. Concurrently, we don’t think sector-wide ratios for Industrials make much sense. The fate of Equifax, Union Pacific Railroad, and American Airlines are hardly tied at the hip.
The lack of obvious sector-wide macro dynamics means that the analysis of individual stocks is necessary for consistent profits in this sector. Consequently, the News Quantified platform has proved highly effective for leveraging market-beating profits from news events in this sector. Everything from major mergers to earnings news to the announcement of mega dollar defense contracts can generate consistently profitable after hours momentum. If you’d like to learn more about using News Quantified to profit from the news, we invite you to attend our next free virtual training seminar. You can sign up using the button below. There’s no obligation or hard sell, just some fundametnal insight into news-based trading and an up close tour of our platform.