Industrial Strength

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Financial journals have been deluged with stories to the effect that all of the 2023 gains in the S&P 500 were caused by 7 (or fewer) stocks, all of which relate to big tech, artificial intelligence and “the new economy.” It infers that all other sectors, including “old economy” Industrials, did not do as well.

The “proof of the pudding” is provided by attribution analysis.  The cap-weighted S&P 500 beat the equally weighted S&P 500 by an unprecedented margin (nearly +13.00%).  The S&P 500 also handily beat the price-per-share-weighted Dow Jones Industrial Average.  But don’t be misled by the Dow’s nomenclature.  Over the decades, the word “Industrial” has lost its meaning as the Dow now includes financial stocks, stocks that do not pay dividends and stocks not on the S&P 500.  This is not your grandfather’s DJIA. 

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But what about old-economy industrial stocks? Are there no longer buying opportunities in this sector?  Actually, quite a few experts predict a mean-reversion drop in 2024 for “The Magnificent Seven” stocks that dominated last year accompanied by a reallocation to other sectors. The industrial sector has been listed prominently as a candidate for the shift.

As I was writing this article, my email featured an analytic report on the industrial sector by a Fidelity Select portfolio manager.  He was bullish on the sector.  Here’s a synthesis of his rationale.

After decades of underinvestment in the US industrial base, supply-chain difficulties during the pandemic and geopolitical tension have highlighted the needs for greater US self-sufficiency. As a result, hundreds of billions of dollars in federal funding and other incentives are set to pour into infrastructure, onshoring/reshoring, combating climate change, and the “electrification of everything.”  This massive investment should help drive long-term growth for the sector.

A sample of the top stock picks mentioned in the article includes:

Current ValuEngine reports on these stocks or ETFS can be viewed HERE

BA –The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems, and services worldwide.  In the news frequently in the past six months, Boeing’s top finance executive warned investors that the company’s production problems would result in a steep hit to its cash flow this quarter.  

HWM– Howmet Industries – Howmet Aerospace Inc. provides advanced engineered solutions for the aerospace and transportation industries in the United States, Japan, France, Germany, the United Kingdom, Mexico, Italy, Canada, Poland, China, and internationally. It operates through four segments: Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels. The company was formerly known as Arconic Inc. Howmet Aerospace Inc,. was founded in 1888, and is based in Pittsburgh, Pennsylvania.

PWR – Quanta Services, Inc. provides infrastructure solutions for the electric and gas utility industry, renewable energy, communications, and pipeline and energy industries in the United States, Canada, Australia, and internationally.  The company was formerly known as Fabal Construction, Inc. and changed its name to Quanta Services, Inc. in November 1997. The company was incorporated in 1997 and is headquartered in Houston, Texas. 

These three stocks, all rated 3 (Hold) by ValuEngine, are all included in this week’s analysis grid below.  Additionally, ValuEngine maintains a Sector Report on the Industrial Products Sector.  It comprises 240 stocks. Taken together, these stocks account for 3% of total market cap and also 3% of total revenues of the aggregate ValuEngine Stock universe.  The equal-weighted rating for all the stocks in the sector is also 3 (Hold).  

Not all Industrial sector stocks are rated in the middle of our universe, however.  Three Industrial sector stocks garner the highest rating, 5 (Strong Buy). The group includes:

XRX – Xerox Inc. operates through two segments, Print and Other; and FITTLE. The Print and Other segment designs, develops, and sells document systems, solutions, and services; and IT and software products and services. The FITTLE segment offers financing solutions for direct channel customer purchases; and lease financing to end-users.  Xerox was founded in 1903 and is headquartered in Norwalk, Connecticut.

LZ – LegalZoom., Inc., together with its subsidiaries, operates an online platform that supports the legal, compliance, and business management needs of small businesses and consumers in the US.  The company was incorporated in 1999 and is headquartered in Glendale, California.

GTLS – Chart Industries engages in the designing, engineering, and manufacturing of process technologies and equipment for the gas and liquid molecules in the United States and internationally. The company operates in four segments: Cryo Tank Solutions, Heat Transfer Systems, Specialty Products, and Repair, Service & Leasing.  Chart Industries was founded in 1859 and is headquartered in Ball Ground, Georgia.

We selected the Vanguard Industrial Sector ETF, VIS, in lieu of the SPDR Select Industrial Sector ETF as the study’s standard of comparison. Given the breadth of the sector, the much broader VIS seemed more representative of the industry as a whole.   

Interestingly, the VIS ETF gets a 2 (Sell) rating from ValuEngine, below the 3 posted by the entire equally weighted sector.  This relates to a question I frequently get at presentations.  Does ValuEngine give any stocks a sell rating?  Yes, as a quantitatively based ratings service, the weekly ratings distributions tend to be symmetric with both a mean and a median very close to 3.0.  In that spirit, here are three stocks rated 1 (Strong Sell, our lowest rating) this week: Alcoa Corp. (AA); Norsk Hydro ADR (NHYDY); and Atmus Filtration (ATMU).

Back to the potential buying opportunities, here is the comparative statistical data for this analysis.

Current ValuEngine reports on these stocks or ETFS can be viewed HERE
Stock Name Boeing Co Howmet Industries Quanta Services Xerox LegalZoom Chart Industries Vanguard Industrial Sector ETFs
Market Cap, (Bllns.) 104.00 26.27 36.25 2.01 2.29 6.26  2.21
ValuEngine Rating 3 3 3 5 5 5 2
VE Forecast 3-mo. Price Return 1.29% 2.90% 2.98% 2.66% 4.79% 4.56% 1.67%
VE Forecast 1-yr. Price Return 2.24% 0.37% -2.13% 15.54% 13.95% 13.25% 4.62%
Last mo. Price Return -14.72% -4.45% 3.24% -15.97% -3.40% 1.08% -1.35%
Last 3 mo. Price Return -14.95% 19.31% 23.50% 0.68% 15.41% 16.35% 10.04%
Last 6 mo. Price Return -7.78% 43.54% 41.0% 12.41% 15.84% -7.0% 20.63%
Historic 1-Yr. Price Return -16.82% 49.34% 49.05% 9.90% 32.07% 15.65% 26.68%
Historic 5-Yr Ann. Price Return -13.63% 25.51% 38.58% -11.61% -37.92% 11.97% 11.14%
Volatility 49.59% 44.1% 32.04% 44.67% 49.40% 62.26% 22.51%
Sharpe Ratio -0.27 0.58 1.20 -0.26 -0.77 0.19 0.49
Beta 1.62 1.34 1.10 1.69 1.27 1.79 1.14
Undervaluation Percentile 25 9 9 71 61 85 32
P/B Ratio Neg. 6.51 41.42 0.73 25 2.13 3.42
P/E Ratio Neg. 32.83 38.03 9.54 71.82 22.72 24.80
P/S Ratio 1.34 3.96 1.74 0.29 3.47 1.87 3.29
PEG Ratio 0.20 2.00 1.75 0.25 0.68 0.25 3.18
EPS Growth 145.19% 16.41% 21.71% 37.65% 105.88% 92.48% 10.51%
Div. Yield 0% 0.% 0.1% 6.2% 0% 0% 1.2%
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  1. Boeing (BA), Xerox (XRX) and LegalZoom (LZ) are all in turnaround mode after posting annualized returns in the negative double digits during the previous 5 years.  In contrast, the other three all had double-digit positive returns during the same time period with Quanta Services (PWR) leading the way with an impressive 38.6% annualized five-year return. Howmet Industries (HWM) posted a healthy 25.5% annualized gain while Chart Industries (GLTS) came in at nearly 12%.  All three eclipsed the 5-year annualized return of 11.1% posted by VIS representing the sector as a whole.
  2. Wrapping up historical performance for shorter periods, PWR was #1 for the 1-month and 3-month periods while HWM fared best in the 6-month period at nearly 44% and the 12-month period at 49%.
  3. XRX, LZ and GLTS all are forecast for 13%-or-greater 12 month price-gains by ValuEngine’s predictive model.  On the other end of the spectrum, the only negative 12-month forecast belongs to Quanta Services (PWR) in what could be seen as a bit of mean reversion.
  4. The ValuEngine valuation model – which is independent from the predictive model – shows signs that all 3 stocks mentioned in the article by the Fidelity Portfolio Manager are a bit overvalued right now.  91% of universe stocks are more undervalued than HWM and PWR.  The third stock, Boeing (BA) is less undervalued than 75% or the universe even after having suffered a large selloff in the past 12 months. 
  5. The three stocks selected by the forecast model, XRX, LZ and GTLS: LegalZoom is more undervalued than 61% or the universe.  For Xerox and Chart Industries, the undervaluation percentile statistic rises to 71% and 85% respectively.  XRX leads all the stocks in traditional value ratios as well. It has just a 9.6 P/E ratio and an 0.7 Price-to-Book Ratio and is selling at 0.25% of its earnings growth rate.  

In summary, those looking to move funds away from the magnificent seven may find a number of stocks to like in the Industrials Sector.  All six stocks covered here are probably worth at least cursory research efforts.  Two of the three stocks mentioned by Fidelity, Quanta Systems and Howmet Industries, have strong earnings growth outlooks and merit considerations as long-term holdings.  Given outstanding lawsuits, Boeing is a bit more speculative in the short-term.  However, it may be for just this reason that some analysts consider it a buying opportunity.  The three stocks rated as strong buys on a potential price-gain basis, Xerox, Chart Industries and LegalZoom look attractive in terms of earnings growth potential and valuation.  However, they are smaller in market cap and higher in volatility, two factors that some may consider problematic.  As always, it is crucial to do one’s own research.  


By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
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