Investors looking to refresh their portfolios should look at the industrial sector. It's been beaten up lately due to a combination of soaring raw material costs, supply chain difficulties, and fears over economic growth prospects in the light of a resurgence in COVID-19 cases. That said, there's a strong case that General Electric (GE -0.30%), UPS (UPS 1.94%), Stanley Black & Decker (SWK 0.70%), Cognex Corporation (CGNX 2.18%), and Danaher (DHR 1.65%) can have a strong 2022. Here's a whistle-stop tour of why these five are attractive for 2022.
Image source: Getty Images.
1. General Electric: The break-up plan makes sense
Since management announced its break-up plan, the stock has been down heavily, but don't be fooled. It isn't so much a market judgment around the plans as a general sell-off in commercial aerospace stocks due to a resurgence in the pandemic. Nevertheless, the plan makes perfect sense, and there's a strong case for arguing that GE is undervalued.
That said, GE Aviation remains GE's most important business. Within that, servicing engines (GE and GE joint venture engines power two-thirds of global flights) is its most crucial activity. As such, investing in GE means taking a position that the pandemic and travel restrictions will ease through 2022.
There's no predicting the behavior of governments. But it appears that the vaccines work, the pandemic is becoming an endemic, therapies and vaccines are creating better patient outcomes, and there's no dispensing with air travel as a crucial part of the economy.
Everything points to GE Aviation recovering over time, and with ongoing strength at GE Healthcare and recovering margins at GE Power and GE Renewable Energy, GE should have a better 2022.
2. Stanley Black & Decker: an undervalued growth stock
This tool and hardware stock has been sold off due to reduced earnings expectations caused by soaring raw material and supply chain costs. That's understandable in itself, but the market is missing that Stanley is likely to exit 2022 in far better shape than when it enters.
Management is increasing prices to offset cost inflation, and it expects profit margins to rise progressively through the year. Meanwhile, integrating the MTD acquisition (lawn and garden equipment) will boost revenue and strengthen the company in a key growth category. As a result, Stanley's management believes it can significantly increase MTD's margin over time. Meanwhile, the investment in new products made in 2021 should bear fruit in 2022.
If the company hits Wall Street analyst expectations for nearly $2 billion in free cash flow (FCF) in 2022, it will trade on less than 15 times FCF (at the current market price). That's far too cheap for a company with good growth prospects, and Stanley Black & Decker is my choice as the best stock in the industrial sector for 2022.
Image source: Getty Images.
3. UPS: upside potential to its 2023 targets
The package delivery giant is hitting all the waypoints on its strategic path and is set for another strong year in 2022. The pandemic and lockdown measures arguably helped the company accelerate the development of relationships with customers in targeted end markets like healthcare and small and medium-sized businesses (SMB). In particular, the latter rushed to add online capability during the lockdowns, and UPS was there to help.
Moreover, the evidence is that UPS is achieving its aim of increasing its U.S. domestic package segment profit margin by being more selective over the type of deliveries it generates revenue from. As a result, UPS is well on its way to achieving its 2023 targets ($98 billion to $102 billion in revenue and $12.4 billion to $14 billion in adjusted operating profit). It wouldn't be surprising to see management raise those targets next year.
4. Cognex Corporation: the growth stock pick
Cognex makes the list because it has the potential for an upside surprise in 2022. The machine vision stock recently took a hit due to a disappointing set of earnings beset with rising supply chain costs, an unfavorable margin mix, and disappointing consumer electronics orders.
However, its automotive end market had a strong year, partly because automakers spent money building electric vehicle production lines. It could have an even better 2022 as automotive production improves. Moreover, part of the unfavorable margin mix is providing an extra level of service to a significant logistics customer likely to place future orders.
Finally, consumer electronics orders are always volatile as they follow customer product development patterns. As the semiconductor shortage eases, consumer electronics companies (and automakers) will likely ramp production.
All told, there's every potential for Cognex to surprise the market with strong orders growth.
Image source: Getty Images.
5. Danaher Corporation: the insurance policy
If the first four stocks all assume the economy will recover from the pandemic, the fifth stock acts as a kind of insurance policy from the risk of an ongoing pandemic. If and when the pandemic comes to an end, Danaher is still well-placed to benefit.
The life sciences and diagnostics company manufactures tools and equipment used in the development of vaccines and therapies, alongside diagnostic tests and equipment used to test for COVID-19 and many other indications. Unfortunately, it looks likely that there will be a demand for such products through 2022, at the very least.
The pandemic has boosted spending on life-sciences research in general. Danaher has been able to significantly increase its installed base of diagnostic test equipment and can plan to increase sales of its non-COVID tests to new customers.
Danaher wouldn't be a stock to buy on a stand-alone basis, but to balance a collection of stocks carrying the risk of a pandemic downside, it makes good sense to hold it.
