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Stock Strategist

Diversified Industrials, Two Years After the Trough

Which stocks have performed best, and what can investors expect going forward?

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This week--Wednesday, March 9, to be precise--marks the two-year anniversary of the infamous 2009 bottom, when the S&P 500 closed at 676.53. We thought it would be fun to look back to see which diversified industrials have fared the best. Not surprisingly, the entire group has outperformed the market since then, with the Industrial Select SPDR ETF (XLI) up a whopping 156%, or about 50% more than the S&P. The reason for this outperformance is fairly straightforward: Industrial stocks are inherently more volatile. The group, which is made up mostly of manufacturers, is influenced by the inventory cycle in addition to final demand. As such, manufacturers suffer the effects of shrinking inventories throughout the value chain during declines in end-user demand, thereby magnifying revenue declines. During upturns, the dynamic is reversed, making the snapback more pronounced than in many other sectors. In addition, the added earnings volatility makes investors less intent on holding the names through hard times, making share prices gyrate even more wildly than the underlying fundamentals.

Mispricing Trumps Everything
We put together a list of 20 of our highest-profile diversified industrial names, then sorted them according to performance since the market bottomed. As far as business quality goes, the list contains many we'd consider best in class in the industrial space, including 3M  (MMM),  Illinois Tool Works (ITW),  Emerson Electric Co.  (EMR),  United Technologies (UTX),  Danaher (DHR), and  Parker Hannifin (PH), to name a few. Though these names have fared well since that fateful day two years ago, only Parker is among the leaders, and even it is only the fifth-best performer. As the table below shows, the results are likely not what most would have imagined.

Eric Landry does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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