As the U.S.'s recovery from the "Great Recession" has
progressed, one big driver of the turnaround has been the
industrial and manufacturing arena. Industrial production rose in
November by 0.4%, according to a new Federal Reserve report,
marking the 15th time in 17 months that production has increased.
And since bottoming in July 2009, the manufacturing sector has
expanded for 16 straight months, according to the Institute for
As a result, industrial and manufacturing stocks -- which were
hammered during the recession and bear market -- have outpaced the
broader market since the March 2009 low. But, just as there's still
slack in U.S. production, so too are there still bargains in the
industrial and manufacturing areas. And, with government stimulus
continuing to flow into the economy, consumers regaining some of
their confidence, and companies having cut a lot of fat during the
downturn, some of these stocks are in good position to continue
Keep in mind, however, that as we get deeper into the recovery,
the rising tide that may have lifted a lot of
industrial/manufacturing-type stocks should lessen, and investors
will likely become more discriminating about which of these stocks
they buy. That means you better pay attention to fundamentals on a
stock-by-stock basis. With that in mind, I recently used my Guru
Strategies, each of which is based on the approach of a different
investing great, to uncover some of the industrials and
manufacturers that have the best fundamentals. Here's a sampling of
what I found.
Flowers Foods, Inc. (
Based in Thomasville, Ga., Flowers operates 40 bakeries, mostly in
the southern and mid-Atlantic U.S., producing a variety of breads,
buns, rolls, snack cakes, and pastries. Its products, which include
Sunbeam bread and Mrs. Freshley's Jumbo Honey Buns, are distributed
both fresh and frozen to foodservice and retail customers.
Flowers ($2.4 billion market cap) gets high marks from two of my
models. My Peter Lynch-inspired strategy considers it a
"fast-grower" because of its 20.5% long-term earnings per share
growth rate (I use an average of the three-, four-, and five-year
EPS figures to determine a long-term rate.) Lynch famously used the
P/E/Growth ratio to find bargain-priced growth stocks, and when we
divide Flowers' 18.1 price/earnings ratio (using trailing 12-month
earnings) by that long-term growth rate, we get a P/E/G of 0.88,
which comes in under the model's 1.0 upper limit.
Another reason this approach likes Flowers is the firm's
financing: The company has a debt/equity ratio of just 18%.
My James O'Shaughnessy-based growth model also likes Flowers, in
part because it has upped EPS in each year of the past five-year
period. O'Shaughnessy found that the price/sales ratio was a better
indicator of future success than the P/E ratio, and this model
likes P/S ratios below 1.5. At 0.95, Flowers makes the grade.
Reliance Steel & Aluminum (
One of the largest metals service center companies in the U.S.,
Reliance makes over 100,000 metal products that range from
stainless steel to aluminum to brass to copper and beyond. The Los
Angeles-based firm ($3.7 billion market cap) has a network of more
than 200 locations in 38 states and countries in Asia, Latin
America, and Europe.
Reliance gets approval from one of my best-performing
strategies, the model I base on the writings of Benjamin Graham.
Graham was an extremely conservative investor, and this approach
requires a firm to have a current ratio (current assets/current
liabilities) of at least 2.0, and more net current assets than
long-term debt. Reliance's current ratio is 2.92, and it has $1.3
billion in net current assets vs. $944 million in long-term
Graham is known as the "Father of Value Investing", so valuation
was, of course, important to him. The strategy I base on his
writings looks at both the P/E ratio and price/book ratio. Reliance
is trading for about 14.9 times TTM earnings and 1.3 times
book/value, which makes it sufficiently cheap to pass this
General Dynamics (
This Virginia-based firm is one of the U.S.'s largest aerospace
& defense firms, making battle tanks and assault vehicles,
armaments and munitions, battleships and nuclear submarines, and
military information technology systems. The $26-billion-market-cap
firm has taken in more than $30 billion in sales over the past 12
General Dynamics gets approval from my Joel Greenblatt-inspired
model. In his Little Book that Beats the Market, Greenblatt
detailed a remarkably simple, remarkably successful approach that
used just two variables: earnings yield and return on capital. With
a 13.9% earnings yield and 57.7% return on total capital, General
Dynamics is the 34th-highest-rated stock in the market, according
to my Greenblatt-based model.
My Lynch-based model also likes GD, which it considers a
"stalwart" because of the firm's moderate 14.8% long-term EPS
growth rate and high sales. Lynch found that these types of big,
steady firms offered protection against downturns and recessions.
Since these kinds of companies often pay dividends, Lynch adjusted
the "G" portfolio of the P/E/G ratio to include dividend yield when
analyzing them. With its 10.8 P/E, 2.4% yield, and that 14.8%
growth rate, General Dynamics has a very solid yield-adjusted P/E/G
of 0.63, a sign that its shares are a bargain. In addition, the
firm has a very reasonable 23.6% debt/equity ratio.
Hawkins, Inc. (
This 72-year-old Minnesota-based firm produces and sells 500
industrial chemicals and 600 reagent grade laboratory chemicals,
which are used by everything from pharmacies to water treatment
facilities to food and dairy producers to research labs, and
Hawkins ($500 million market cap) is another favorite of my
Lynch-based model. The firm has been growing EPS at a 32% clip over
the long term, and that and its 20.1 P/E ratio make for a solid
0.63 P/E/G. In addition, the company has a very strong balance
sheet -- it has no long-term debt -- another reason the Lynch-based
model likes it.
Analog Devices, Inc. (
Analog is sort of a high-tech industrial, manufacturing electronic
equipment that translates real-world phenomena like temperature,
pressure, sound, light, speed and motion into electrical signals.
These signals are used in a variety of products, including medical
imaging equipment, factory automation systems, portable electronic
devices, energy management systems, wireless communications
equipment, digital cameras, cars, and digital televisions.
Analog ($11 billion market cap) is another stock that gets high
marks from my Lynch-based strategy. It considers the stock a
"stalwart" because of its 16% long-term EPS growth rate and
multi-billion-dollar annual sales. The strategy likes the stock's
0.88 yield-adjusted P/E/G, as well as the fact that its
inventory/sales ratio decreased from 12.6% two years ago to 10.1%
this past year. Lynch astutely observed that unwanted inventory
piling up is a bad sign, so this strategy likes to see a declining
inventory/sales figure. It also likes Analog's 12.5% debt/equity
I'm long GD and RS.