In this article, we will take a look at the 13 most undervalued industrial stocks to buy according to hedge funds.
More and more data points are now indicating an imminent recession in 2023 as the Federal Reserve’s consistent rate hikes didn’t do any quick wonders to stop inflation or slow down the labor market. In this backdrop, investors are eager to invest in stocks that have low volatility, pay dividends and have long-term growth potential. Industrial stocks may give some refuge to investors in this scenario.
According to a report by Fidelity, the industrial sector volatility is among the lowest on record over the past few years. The report made a comparison of the equity market sector volatility (15%) with the volatility of several sectors in the market by tracking top 3,000 U.S. stocks as measured by market capitalization. The comparison data, which spans close to two decades, shows that the volatility of the industrials sector is 18%, compared to the 15% market average. The sector fares better than energy, IT, materials, real estate, consumer discretionary and several other sectors. Only three sectors were better than industrials when it comes to volatility: utilities, healthcare and consumer staples.
However, the industrials sector is closely linked to the broader economic cycles. When the economy is thriving and demand is strong, industrials tend to perform better. In a report published in June 2022, Edward Jones said that some of the key growth drivers for the industrial sector are construction and infrastructure investment, manufacturing, increasing regulation for energy and fuel efficiency, growth in China, India, Russia, Brazil and the rising middle class.
Some major industrial stocks gaining attention this year include Ferguson plc (NYSE:FERG), 3M Company (NYSE:MMM) and Northrop Grumman Corporation (NYSE:NOC).
Photo by Remy Gieling on Unsplash
Our Methodology
For this article, we scoured the Insider Monkey’s database of 943 hedge funds and their holdings and picked the most popular industrial stocks among these hedge funds which have PE ratios (trailing or forward) under 15 as of February 26.
Most Undervalued Industrial Stocks To Buy According To Hedge Funds
13. TFI International Inc. (NYSE:TFII)
Number of Hedge Fund Holders: 19
Canadian logistics and transportation company TFI International Inc. (NYSE:TFII) ranks 13th in our list of the most undervalued industrial stocks to buy according to hedge funds. Earlier in February, TFI International Inc. (NYSE:TFII) posted its Q4 results. Adjusted EPS in the period came in at $1.72, missing estimates by $0.01. Revenue in the quarter fell about 8.4% on a YoY basis to $1.96 billion, missing estimates by $110 million. Despite the earnings miss, TFI International Inc. (NYSE:TFII) rose amid speculation about the company’s acquisition interest in ArcBest Corp after it was revealed that TFI now owns a 4% stake in ArcBest Corp.
12. Masco Corporation (NYSE:MAS)
Number of Hedge Fund Holders: 28
Home construction and improvement products maker Masco Corporation (NYSE:MAS) was upgraded by Deutsche Bank to Hold from Sell recently. The bank said that Masco Corporation (NYSE:MAS) has provided a “reasonably achievable” guidance for 2023. The bank believes the underperformance of Masco Corporation (NYSE:MAS) when compared to its peers justifies an upgrade.
Recently, Masco Corporation (NYSE:MAS) also upped its quarterly dividend by 1.8%.
For full-year 2023, Masco Corporation (NYSE:MAS) expects its adjusted EPS to come in between $3.10 to $3.40, less than the consensus estimate of $3.64. Deutsche Bank’s estimate was $3.30.
Oakmark Funds made the following comment about Masco Corporation (NYSE:MAS) in its Q4 2022 investor letter:
“During the quarter, we added one new position—Masco Corporation (NYSE:MAS), a leader in home improvement products. We believe the market is failing to properly reward the company’s significant upgrades in its product offerings over the past decade. During this time, management has sold off the company’s more cyclical, lower return businesses, such as insulation and windows and cabinets, and now Masco focuses its efforts on some of the strongest and most recognizable brands in the industry. The company’s portfolio of products—primarily coatings (Behr) and plumbing fixtures (Delta, Hansgrohe)—are more resilient, lower cost and higher margin categories. Both product segments compete within heavily consolidated industries, exhibit solid pricing power, and skew meaningfully toward the less cyclical repair-andremodel markets. Despite this greatly improved business mix, Masco trades at a discount to historical levels and comfortably below a market multiple. We believe this dislocation presents an attractive opportunity for us to invest in a well-managed, high-quality portfolio in a sector that’s currently out of favor.”
11. Expeditors International of Washington, Inc. (NASDAQ:EXPD)
Number of Hedge Fund Holders: 28
Logistics and freight forwarding company Expeditors International of Washington, Inc. (NASDAQ:EXPD) ranks 11th in our list of the most undervalued industrial stocks to buy according to hedge funds.
At the end of the fourth quarter of 2022, 28 hedge funds tracked by Insider Monkey reported owning stakes in Expeditors International of Washington, Inc. (NASDAQ:EXPD). The total value of these stakes was about $352 million. The biggest stakeholder of Expeditors International of Washington, Inc. (NASDAQ:EXPD) during this period was Jean-Marie Eveillard’s First Eagle Investment Management which owns a $286 million stake in the firm.
Goldman Sachs recently named Expeditors International of Washington, Inc. (NASDAQ:EXPD) among a list of companies that are expected to benefit from the reopening of China.
10. Snap-on Incorporated (NYSE:SNA)
Number of Hedge Fund Holders: 29
Professional and industrial tools maker Snap-on Incorporated (NYSE:SNA) is one of the notable industrial stocks to buy according to hedge funds. Of the 943 hedge funds tracked by Insider Monkey at the end of the December quarter, 29 funds had stakes in Snap-on Incorporated (NYSE:SNA).
Recently, Snap-on Incorporated (NYSE:SNA) declared a quarterly dividend of $1.62 per share, the same as the previous quarter. Forward dividend yield came in at 2.62%. The dividend is payable on March 10 to shareholders of record as of February 23.
9. CNH Industrial N.V. (NYSE:CNHI)
Number of Hedge Fund Holders: 32
Shares of Italian-American industrials company CNH Industrial N.V. (NYSE:CNHI) have gained about 15% over the past 12 months. Still, CNH Industrial N.V. (NYSE:CNHI) presents an attractive entry point to investors. Its PE ratio stands at 12.87 as of February 26. Recently, Bank of America picked the industrial stock for 2023 and said in a note that it sees more room for upside potential especially after the spinoff of CNH Industrial N.V. (NYSE:CNHI)’s on-highway business.
At the end of the fourth quarter of 2022, 37 hedge funds tracked by Insider Monkey reported owning stakes in CNH Industrial N.V. (NYSE:CNHI). The biggest hedge fund stakeholder of CNH Industrial N.V. (NYSE:CNHI) during this period was Natixis Global Asset Management’s Harris Associates which owns a $1.5 billion stake in the company. The second biggest stakeholder of CNH Industrial N.V. (NYSE:CNHI) was John Smith Clark’s Southpoint Capital Advisors which has a $241 million stake in the company.
Artisan Global Discovery Fund made the following comment about CNH Industrial N.V. (NYSE:CNHI) in its Q4 2022 investor letter:
“Among our top contributors were CNH Industrial N.V. (NYSE:CNHI), Lattice Semiconductor and Ingersoll Rand. CNH Industrial is the second largest global agricultural equipment company (primarily tractors and combines) with leading brands Case IH and New Holland. The company reported top-line growth of 23.9% in the quarter, which was meaningfully ahead of expectations, and shares rallied on the news. After a long period of relatively stagnant technological developments in the agricultural field, CNH is on a journey to meaningfully expand their technological offerings in areas such as precision agriculture and autonomous technology. Our research indicates that the fleet of agricultural equipment in the world is as old as it has ever been going back 40 years, meaning there is pent-up demand at a time when there is new technological innovation. We believe this sets up CNH for a long-term secular growth opportunity. Last, in our view, additional internal catalysts—a new CEO who previously led an impressive turnaround at Polaris, greater pricing discipline and improvements to its supply chain efficiency—will enable it to narrow its margin gap with competitor John Deere in the periods ahead.”
8. United Parcel Service, Inc. (NYSE:UPS)
Number of Hedge Fund Holders: 36
United Parcel Service, Inc. (NYSE:UPS) falls under the integrated freight and logistics segment of the broader industrials sector. United Parcel Service, Inc. (NYSE:UPS) ranks 8th in our list of the most undervalued industrial stocks to buy according to hedge funds. As of the end of the fourth quarter of 2022, 36 hedge funds reported owning stakes in United Parcel Service, Inc. (NYSE:UPS). Recently, United Parcel Service, Inc. (NYSE:UPS) declared a quarterly dividend of $1.62 per share, which was a 6.6% increase from the previous dividend. Forward dividend yield came in at 3.66%. The dividend is payable on March 10 for shareholders of record as of February 21. UPS, like Ferguson plc (NYSE:FERG), 3M Company (NYSE:MMM) and Northrop Grumman Corporation (NYSE:NOC), is one of the most famous stocks among the elite hedge funds tracked by Insider Monkey.
In the fourth quarter, United Parcel Service, Inc. (NYSE:UPS)’s adjusted EPS came in at $3.62, beating estimates by $0.03. Revenue in the quarter fell 2.7% on a YoY basis to $27 billion, missing estimates by $10.3 billion.
Diamond Hill Capital made the following comment about United Parcel Service, Inc. (NYSE:UPS) in its Q3 2022 investor letter:
“United Parcel Service, Inc. (NYSE:UPS) is the world’s largest package deliverer, operating globally. The company and its share price had benefited from pandemic-related spikes in shipping demand while supply was constrained (grounding of airlines and their associated space), leading to increased pricing power. Our view is such conditions will not persist as the environment normalizes. In Q3, UPS reported weak results and a decline in volume in its US domestic business, pressuring the share price.”
7. PACCAR Inc (NASDAQ:PCAR)
Number of Hedge Fund Holders: 38
PACCAR Inc (NASDAQ:PCAR) falls under the category of heavy machinery within the broader industrials sector. It is one of the most undervalued industrial stocks to buy according to hedge funds. At the end of the fourth quarter of 2022, 38 hedge funds reported owning stakes in PACCAR Inc (NASDAQ:PCAR), according to Insider Monkey’s database of 943 hedge fund holdings. This was up from 30 hedge funds having stakes in PACCAR Inc (NASDAQ:PCAR) in the previous quarter. This shows hedge fund sentiment around the stock is positive.
In January, PACCAR Inc (NASDAQ:PCAR) posted Q4 results. GAAP EPS in the quarter came in at $2.64, beating estimates by $0.44. Revenue in the period jumped about 21.5% on a YoY basis to reach $8.13 billion, beating estimates by $970 million.
TimesSquare Capital made the following comment about PACCAR Inc (NASDAQ:PCAR) in its Q3 2022 investor letter:
“PACCAR Inc (NASDAQ:PCAR) designs and manufactures light, medium, and heavy-duty commercial trucks. We decided to sell the position with a looming risk of European energy rationing that could impact manufacturing output this winter. Its shares edged forward by 3% for the time it was held in the quarter.”
6. Carlisle Companies Incorporated (NYSE:CSL)
Number of Hedge Fund Holders: 41
Carlisle Companies Incorporated (NYSE:CSL) is one of the most undervalued industrial stocks to buy according to hedge funds. Carlisle Companies Incorporated (NYSE:CSL) has a PE ratio of 14.63 as of February 26. A total of 41 hedge funds tracked by Insider Monkey reported having stakes in Carlisle Companies Incorporated (NYSE:CSL). The total value of these stakes was over $794 million. The biggest stakeholder of Carlisle Companies Incorporated (NYSE:CSL) during this period was David Blood and Al Gore’s Generation Investment Management which owns a $253 million stake in the company.
Madison Funds made the following comment about Carlisle Companies Incorporated (NYSE:CSL) in its fourth-quarter 2022 investor letter:
“The bottom five detractors for the quarter were Carlisle Companies Incorporated (NYSE:CSL), Brown & Brown, Brookfield, CarMax, and Armstrong World Industries. Following robust outperformance during the first three quarters of the year, Carlisle shares took a step back this quarter as investors worried about commercial roofing demand in a potentially slowing economy.”
In the next part of this article we will take a look at some more undervalued industrial stocks, including Ferguson plc (NYSE:FERG), 3M Company (NYSE:MMM) and Northrop Grumman Corporation (NYSE:NOC).
5. Carrier Global Corporation (NYSE:CARR)
Number of Hedge Fund Holders: 42
Heating, ventilation and air conditioning solutions company Carrier Global Corporation (NYSE:CARR) has gained about 6% year to date through February 26. In the fourth quarter, Carrier Global Corporation (NYSE:CARR)’s adjusted EPS came in at $0.40, meeting estimates. Revenue in the quarter fell about 1% on a YoY basis to $5.1 billion, beating estimates by $30 million. For 2023, Carrier Global Corporation (NYSE:CARR) expects its sales to come in at around $22 billion, posting an organic growth of low to mid-single-digit organic growth. The consensus estimate for the sales figure was $20.39 billion.
At the end of the fourth quarter of 2022, 42 hedge funds reported owning stakes in Carrier Global Corporation (NYSE:CARR). The total value of these stakes was about $926 million.
4. Northrop Grumman Corporation (NYSE:NOC)
Number of Hedge Fund Holders: 49
Northrop Grumman Corporation (NYSE:NOC) has been in the spotlight as geopolitical tensions heat up around Russia-Ukraine war amid the United States’ pledge to continue supporting Ukraine no matter the costs. Recently, Credit Suisse analysts lowered their estimates for Northrop Grumman Corporation (NYSE:NOC)’s earnings before interest and taxes from 2023 to 2025. The investment firm’s analysts also decreased their price target for the stock to $490 from $500.
At the end of 2022, 49 hedge funds tracked by Insider Monkey reported owning stakes in Northrop Grumman Corporation (NYSE:NOC). The total value of these stakes was over $1.5 billion. The biggest stakeholder of Northrop Grumman Corporation (NYSE:NOC) during this period was Rajiv Jain’s GQG Partners which owns a $428 million stake in the firm.
LRT Capital made the following comment about Northrop Grumman Corporation (NYSE:NOC) in its October investor letter:
“Based in Virginia, Northrop Grumman Corporation (NYSE:NOC) is one of the world’s largest defense contractors with annual revenue more than $30 billion. The company operates in a cozy oligopoly, that after decades of consolidation the US defense market is now controlled by five large companies: The Boeing Company (BA), General Dynamics Corporation (GD), Lockheed Martin Corporation (LMT), Northrop Grumman Corporation (NOC), and Raytheon Technologies Corporation (RTX).
Industry barriers to entry are immense, government procurement cycles are extremely long, and the consolidated industry structure reflects this. This industry structure has allowed Northrop to earn stable mid-teens returns on invested capital (ROIC) and grow earnings per share at a rate of over 13% per year in the past decade, despite a topline that has grown only in-line with inflation. Even after the recent run-up in the stock price, it trades at approximate 15x, next year’s earnings estimates, far below the S&P 500 index, despite being an above average company. While nominally, there are five major defense contractors, the true industry concentration is even higher because not all companies compete in all possible business segments. General Dynamics’ division submarine division, Electric Boat, is the sole supplier of nuclear power submarines in the United States. Lockheed Martin is the sole supplier of the F-35 and F-22. Northrop was the sole bidder on the contract to develop the next generation of intercontinental ballistic missiles; and so on…” (Click here to read the full text)
3. 3M Company (NYSE:MMM)
Number of Hedge Fund Holders: 52
Industrial giant 3M Company (NYSE:MMM) stock has been under pressure after the company posted weak Q4 results and also warned of sales declines this year. During the fourth quarter, 3M Company (NYSE:MMM)’s profits fell 60% to $541 million, or 98 cents a share, from $1.34 billion, or $2.31 a share, a year earlier. 3M Company (NYSE:MMM) said it was negatively affected by a strong dollar as it hit its overseas sales. 3M Company (NYSE:MMM) said that it expects market and macroeconomic challenges to continue in 2023. However, it said supply chains are improving. Despite this, 3M Company (NYSE:MMM) made investors happy by increasing its quarterly dividend. 3M Company (NYSE:MMM) declared a quarterly dividend of $1.50 per share, a 0.7% increase from the previous dividend of $1.49. Forward dividend yield came in at 5.13%. The dividend is payable on March 12.
As of the end of the fourth quarter of 2022, 52 hedge funds reported owning stakes in 3M Company (NYSE:MMM), up from 49 hedge funds in the previous quarter. The total value of these stakes was about $1.6 billion.
2. Builders FirstSource, Inc. (NYSE:BLDR)
Number of Hedge Fund Holders: 52
Building material company Builders FirstSource, Inc. (NYSE:BLDR) ranks second in our list of the most undervalued industrial stocks to buy according to hedge funds.
Of the over 940 hedge funds tracked by Insider Monkey, 52 hedge funds reported owning stakes in Builders FirstSource, Inc. (NYSE:BLDR).
In November, Builders FirstSource, Inc. (NYSE:BLDR) expanded its existing stock repurchase plan by $1 billion to a total of approximately $1.5 billion inclusive of the remaining outstanding authorization at the end of the third quarter of 2022.
Praetorian Capital made the following comment about Builders FirstSource, Inc. (NYSE:BLDR) in its Q3 2022 investor letter:
“Builders FirstSource, Inc. (NYSE:BLDR) produces and distributes building materials, primarily for the home building industry. It trades at a low-single digit cash flow multiple on recent earnings and is using that cash flow to rapidly repurchase shares. One could say that the low multiple is due to peak cyclical earnings. I take a different view and believe that we’re in the early stages of a long-term housing boom caused by migration to low tax states along with a catch-up phase as home construction rates were below trendline over the past decade. I believe that the US needs in excess of 1 million new single-family homes each year, just to provide for population growth, ignoring the other factors. As a result, this business does not appear to be at peak earnings; instead, I believe we are seeing a new baseline for earnings—though the earnings will be quite volatile—particularly if interest rates remain elevated or increase further.”
1. Ferguson plc (NYSE:FERG)
Number of Hedge Fund Holders: 53
Ferguson plc (NYSE:FERG) is one of the most notable names in the industrials sector. Ferguson plc (NYSE:FERG) is also highly popular among the elite hedge funds tracked by Insider Monkey. 53 hedge funds out of the 943 funds in Insider Monkey database had stakes in Ferguson plc (NYSE:FERG) at the end of the fourth quarter of 2022, much higher than 42 hedge funds in the previous quarter. This shows that hedge funds piled into Ferguson plc (NYSE:FERG) during the last quarter of 2022.
In December, Ferguson plc (NYSE:FERG) announced continuation of its $2.5 billion share repurchase program. During the same month Ferguson plc (NYSE:FERG) posted fiscal first quarter results, according to which its adjusted EPS came in at $2.95, beating estimates by $0.16. Revenue in the quarter jumped about 16.6% on a YoY basis to reach $7.93 billion, beating estimates by $250 million. Ferguson plc (NYSE:FERG) also reaffirmed its FY2023 guidance. It expects its net sales to grow by low single digits.
You can also take a peek at 19 Biggest Outdoor Brands and Companies and 10 Most Undervalued Solar Stocks to Buy.
Suggested articles:
- 10 Hot Tech Stocks To Buy Now
- 10 Hot Healthcare Stocks To Buy Now
- 30 Most Famous Yale Students of All Time
Disclosure: None. 13 Most Undervalued Industrial Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.
