There is something gratifying about the industrials. Sectors like tech, financials, health, a lot of them are just too hard for my thick skull to be able to tell if they have a competitive advantage. Great money can be made in these sectors, but I’m generally not able to identify those opportunities, and instead I get exposure via indexing.
Industrials, however, make things that are tangible, useful, and–important for my investing style–understandable. The sector can be considered boring, and thereby overlooked, especially in the mid and small cap areas.
The main pitfalls to investments in industrials are commoditization and cyclicality, lessons in which I have bitter experience. The industrial companies that can thrive and become stronger in the face of those headwinds are ones that have a sustainable competitive edge and give the market a long-term beatdown.
How can you tell if an industrial has an edge if you are not an engineer? The “burden of proof” is on a company to tell a non-specialist why it is a better animal or has a better mousetrap. This information can usually be found in the slide deck of an investor presentation or the Annual Report under “Competition.” Careful: many presentations are littered with how their sector is expected to boom and the implied potential for growth is a tempting siren song, but the bottom line is most companies don’t say why they will take market share over their competitors. I have to give them a pass.
So who clears this hurdle? Here’s a short list, and I’m open to candidates that I haven’t found yet. Remember, I’m talking about companies with a superior product and DNA, but not valuations; so I’m not calling these stocks either cheap or overpriced right now (did I mention I was a buy-and-hold investor?).
Hurco Companies, Inc. (NASDAQ:HURC) makes machining tools, whereby small to medium sized metalworking shops can shape parts for aerospace, energy, or any other application. I’m hoping Hurco’s advantage in this crowded space lies with the built-in software that enables lower-skilled machinists be productive more quickly.
Simpson Manufacturing Co, Inc. (NYSE:SSD) makes mission-critical construction materials, primarily the metal braces that keep the beams of your house together. They have a strong R&D ethic, and are the trusted name in this space, especially in areas with seismic or storm activity. This stock showed up on my screener several times before I could bothered researching them—how could there be a moat in this space? Simpson has made one over the decades, and a high-margin one at that, but it is not bulletproof, and they are seeing some increased competition.