In this article, we will take a look at the 5 most undervalued industrial stocks to buy according to hedge funds. To see more such companies, go directly to 13 Most Undervalued Industrial Stocks To Buy According To Hedge Funds.
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.
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