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12/7/2012 5:30:00 PM
In late November,market cap. The purpose of the exercise was to pinpoint which slivers of the market were the best-positioned to make big gains in 2013, since as much as 40% of an individual stock's performance is ultimately attributable to its sector's performance.
Although a handful of sector/market cap groups stood out as winners, one group in particular was an obvious "must have" for 2013: Mid-cap industrial stocks.
Yes, many of the stocks in this segment of the market are not only boring, but also unfamiliar to many investors. But that's OK -- boring, obscure stocks are often the ones that quietly dole out the biggest rewards.
With that in mind, here are the top three picks from the group that investors should consider buying as they head into the new year.
1. Triumph Group (
In each of the past 11 quarters, Triumph Group has toppedearnings estimates. Last quarter, for instance, the company beat estimates of $1.33 by earning $1.57 per share. In the quarter before that, Triumph earned $1.48, leaving expectations of $1.28 per share in the dust.
Looking ahead, analysts expect the contractor to grow thebottom line by 22% per year. Given the strong growth trend already in place though, in addition to a very palatable trailing price-to-earnings (P/E ) ratio of 10.9, this boring little contractor is simply too underestimated.
2. URS Corp. (
It's still all rather mundane stuff, but like Triumph, there's nothing mundane about itsbalance sheet . URS has grown the bottom line every year since 2007, with only one minor exception in 2011 when earnings fell from $3.54 per share in 2010 to $3.53 per share the next year. The company is back on track though, on pace to earn $4.27 per share this year. That 21% growth forecast versus the forward-looking earningsmultiple of only 8.6 makes this stock a hidden bargain.
3. Trinity Industries Inc. (
Also like URS and Triumph, Trinity Industries has a fundamental pedigree that makes it buy-worthy: The forward-looking P/E is a mere 9, and earnings are forecast to grow more than 16% next year. Trinity fell short of revenue as well as earnings estimates last quarter, but sales were still up 18% compared with last year, and per-share earnings were higher by 90%. As for thecatalyst that really could jolt Trinityshares out of what's now almost a two-year slump, don't worry -- it's likely on the way.
Although rail cars deliveries are expected to fall 15% in 2013 compared with 2012's levels, by 2014, sales of railroad cars are expected to exceed 2012's total by more than 22%. Simultaneously, if the United States is going to recover at all, this rebound is going to have to materialize in 2013. Those converging trendswill put all of Trinity's businesses into high gear.
Risks to Consider: As strong as any industry orcorporation can be, no company is completely immune to setbacks. The primary risk these three stocks face is the same most other companies face: A broad economic slowdown.
Action to Take --> Generally speaking, one stock from a single sector/market-cap group would be enough to fill a hole in a portfolio, while two stocks from that group would be overkill. In this particular case though, these three stocks are different enough from one another that owning a piece of all three wouldn't be redundant.
Investors who only have room for one new pick, however, should consider Triumph Group first. It's proven the most consistent of the three and is highly diversified. Shareholders willing to sit tight for at least a year could realistically find themselves up 30%, if not more, by this time in 2013.