10 Best Hardware Stocks to Buy Now

Published on April 30, 2021 at 10:37 am by Usman Kabir in Hedge Funds, News

In this article we will take a look at the 10 best hardware stocks to buy now. You can skip our comprehensive analysis of these companies and go directly to the 5 Best Hardware Stocks to Buy Now.

The world economy was mostly shuttered throughout 2020 as governments around the world scrambled to contain the spread of the COVID-19 pandemic. One of the side effects of the restrictions placed on business activity was that companies making tools and hardware required for other businesses to function took a huge hit in sales as economic activity ground to a complete halt. For example, one of the biggest hardware firms in the US, Stanley Black & Decker, Inc. (NYSE: SWK), reported only a 1% increase in sales during 2020.

However, slow growth in the second half of the year on the back of increased optimism resulting from the development of a coronavirus vaccine helped Stanley Black & Decker, Inc. (NYSE: SWK) bounce back and the firm reported a 19% year-on-year increase in sales in the fourth quarter of 2020. The total earnings for the firm during the period also increased by roughly 50% compared to the same time last year. The firm expects steady growth throughout 2021 and it views the pandemic as only a temporary setback for the hardware sector.

Technology Hardware Stocks

Hardware is a vast industry, comprising both computer hardware and general hardware. Even though it’s the software companies that get all the attention, notable hardware companies like Intel Corporation (NASDAQ: INTC), QUALCOMM, Inc. (NASDAQ: QCOM) and Cisco Systems Inc (NASDAQ: CSCO) provide the necessary networking and computing hardware that form the basis of data centers, servers, storage houses and the modern Cloud-computing landscape. Major hardware companies are currently getting clobbered by the global chip shortage that is wreaking havoc in the industry. During the Q1 earnings call, Intel Corporation (NASDAQ: INTC) CEO Pat Gelsinger warned that the chip shortage in the industry could last several more years.

On the other hand, QUALCOMM, Inc. (NASDAQ: QCOM), a leading hardware company, recently beat analysts’ estimates for the first quarter as the company’s 5G hardware sales were better than expectations. The company said that its chip-making segment made about $6.28 billion in revenue, an increase of 52%. Handsets division of QUALCOMM, Inc. (NASDAQ: QCOM) accounted for about $4 billion of this revenue.

Cisco Systems Inc (NASDAQ: CSCO), another leading hardware player, however, is treading a different path. Even though networking and data center hardware remains one of the key focus areas for the company, it’s diversifying its revenue stream to shift towards software. In 2020, more than half of Cisco Systems Inc (NASDAQ: CSCO) revenue came from software, as the coronavirus pandemic boosted the demand of its software products like Catalyst 9000, Security, WebEx and several other SaaS solutions.

General Hardware Stocks

According to investment advisory Research and Markets, the hardware and hand-held tools market is expected to grow by more than $5 billion this year at a compound annual growth rate of 3.6%. The service tools sector of the hardware market will alone reach close to $13 billion in market capitalization by 2025, the advisory claims. Hand-held tools usually comprise products that are not powered by electricity. Snap-on Incorporated (NYSE: SNA), one of the leading names in the hand-held tools business, is leading this growth.

Snap-on Incorporated (NYSE: SNA) has recently diversified its business model and is exploring strategic investments in the technology sector to further boost the core business of the firm. As US President Biden pledges increased spending on American manufacturers, the tool-making firm could benefit from the incentives the government offers to help local firms expand operations. Snap-on is not the only firm that would benefit from the plan. Larger machine-making companies could also witness explosive growth.

Caterpillar Inc. (NYSE: CAT), a heavy industry and construction equipment maker, would increase sales ten-fold if the US government approves the hundreds of infrastructure projects that are part of the jobs plan. The boost that Caterpillar Inc. (NYSE: CAT) could get from the Biden initiative compliments the recovery tailwinds in the construction sector as the economy reopens. Already, the share price of the firm has soared more than 20% so far this year and outperformed industry peers in the post-pandemic economy.

However, the uncertainty surrounding the reopening of business activities and the new challenges it brings have been clouding the minds of investors. The entire hedge fund industry is feeling the reverberations of the changing financial landscape. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.

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With this context in mind, here is our list of the 10 best hardware stocks to buy now. Our focus in this article is on general hardware stocks, including home improvement and tools companies.

Best Hardware Stocks to Buy Now

10. Applied Materials, Inc. (NASDAQ: AMAT)

Number of Hedge Fund Holders: 61

Applied Materials, Inc. (NASDAQ: AMAT) is a Santa Clara-based company that makes equipment used in the manufacture of semiconductor chips around the world. It was founded in 1967 and is placed tenth on our list of 10 best hardware stocks to buy now. The technologies marketed by the company include epitaxy, ion implantation, rapid thermal processing, physical vapor deposition, chemical vapor deposition, as well as selective deposition and removal, among others.

Applied Materials, Inc. has a market cap of more than $128 billion and posted annual revenue of more than $20 billion in 2020. On April 19, investment advisory Citi picked Applied Materials as its top semiconductor equipment pick amid a shortage of chips in the world due to the high demand for their use in electronic devices.

At the end of the fourth quarter of 2020, 61 hedge funds in the database of Insider Monkey held stakes worth $3.6 billion in the firm, up from 59 in the preceding quarter worth $2.4 billion.

9. The Scotts Miracle-Gro Company (NYSE: SMG)

Number of Hedge Fund Holders: 29

The Scotts Miracle-Gro Company (NYSE: SMG) is an Ohio-based company that manufactures and sells consumer lawn, garden and pest control products. Some of the products sold by the firm include lawn fertilizers, grass seed, spreaders, outdoor cleaners, and other lawn-related solutions like weed, pest, and disease control. Scotts Miracle-Gro was founded in 1868 and is placed ninth on our list of 10 best hardware stocks to buy now.

The Scotts Miracle-Gro Company (NYSE: SMG) raised more than $500 million on March 11 in an unregistered offering. The company aims to use the money to reduce borrowings under the senior secured revolving credit facility.

Out of the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in the firm with 828,318 shares worth more than $164 million.

Roubaix Capital, in their Q4 2020 investor letter, said that The Scotts Miracle-Gro Company (NYSE: SMG) is included in their list of the companies they want to short. Here is what Roubaix Capital has to say about The Scotts Miracle-Gro Company in their Q4 2020 investor letter:

“Companies including Scotts Miracle-Gro (SMG) have seen their sales accelerate to unsustainable levels that are not consistent with their mature end markets. We expect sales to slow and eventually give back some of the one-time gains caused by the unusual circumstances of 2020. Further, we question the sustainability of current peak valuations in the face of likely peak sales. We believe companies with such characteristics could face a combination of negative earnings revisions and lower valuations as the demand reality sets in this year. We also anticipate that companies that have benefited from consumers being homebound will see very challenging comparisons in 2021. No doubt, spending on home improvement and furnishing grew at unsustainable rates in 2020.”

8. Masco Corporation (NYSE: MAS)

Number of Hedge Fund Holders: 40

Masco Corporation (NYSE: MAS) is a Michigan-based firm that makes home improvement and home construction products. The company comprises more than 20 smaller firms in the hardware business working together. Masco has more than 80 manufacturing facilities across the world, 60 of which are in the United States. Masco is placed eighth on our list of 10 best hardware stocks to buy now. It makes and sells faucets, showerheads, handheld showers, valves, bathing units, sinks, and toilets, among others.

Masco Corporation (NYSE: MAS) has a market cap of more than $16 billion and posted $7 billion in annual revenue in 2020, up from $6.7 billion in 2019. On April 7, investment bank JP Morgan picked Mascon as one of the undervalued stocks that stood to benefit from a boom in the prices of home building products across the United States.

At the end of the fourth quarter of 2020, 40 hedge funds in the database of Insider Monkey held stakes worth $712 million in the firm, down from 46 in the preceding quarter worth $878 million.

Fiduciary Management Inc., in their Q1 2021 investor letter, mentioned Masco Corporation (NYSE: MAS). Here is what Fiduciary Management Inc. has to say about Masco Corporation in their Q1 2021 investor letter:

“Masco Corporation, headquartered in Livonia, Michigan, is a global leader in the design, manufacture, and distribution of branded home improvement and building products. The company’s portfolio of well-recognized brands includes Behr paint, and Delta and Hansgrohe bath and shower fixtures. Operations are divided across two segments: Plumbing Products (58% sales, and 58% operating profit) and Decorative Architectural Products: (42%, and 42%). The company generated 2020 sales profit of $7.2 billion, and operating profit of $1.3 billion. Sales are split between North America (81%), Europe (12%), China (3%), UK (2%), and Other (2%).

Good Business

• Following several key portfolio actions in recent years (the 2015 spin-off of their installation business serving new construction, and the sale of their windows and cabinetry businesses in 2019 and 2020, respectively), the business has structurally increased its sustainable growth, margin, and return profile.
• Masco is now comprised mostly of low-ticket and high-impact home improvement products in growing categories (paints, stains, faucets, etc.), with a sector-leading 89% of sales from the less cyclical and higher-margin repair and remodel (R&R) market.
• The company generally holds number one or two positions in its major markets. Competitive advantages include its brand strength built over several decades, and close alignment with advantaged retail and distribution partners.
• Masco’s return on invested capital (ROIC) was 26% in 2020. The company’s ROIC has averaged around 20% over the last 3, 5, and 10-year periods.
• The company has been a terrific generator of free cash flow, is conservatively financed, and is easy to understand.

Valuation

• The stock trades at a mid-teens forward earnings per share multiple (EPS), a discount to its 10-year average of 19.6 times.
• It also trades at about a 20% discount to the median of its peers on a forward enterprise value-to-EBITDA.
• Masco’s discount is particularly notable considering it leads its peer group in ROIC and long-term EPS growth, while also carrying well-below-average exposure to more cyclical new construction markets.

Management

• Keith Allman has been with Masco since 1998 and has served as Chief Executive Officer since February 2014. Under his leadership, the company has focused the business on higher-margin and less cyclical markets where it has competitive advantage and emphasized innovation and capital discipline. He beneficially owns over 1.1 million shares of the company as of the latest proxy.
• Management demonstrates discipline in allocating free cash flow and has a clear understanding of ROIC (tied to compensation), steering clear of high-priced acquisitions, and accelerating share repurchase activity when the stock has traded below intrinsic value.

Investment Thesis

Masco provides FMI exposure to the residential housing market through a best-in-class branded building products company with strong leverage to the attractive R&R segment. Although the stock has periodically reflected concerns over higher raw material costs, rising interest rates, and the outlook for new construction, we believe the company provides a good balance of offensive and defensive attributes. At a reasonable valuation, considering our expectation for mid-single-digit organic sales and double-digit EPS growth over the long term, we continue to believe in the long-term prospects.”

7. Watts Water Technologies, Inc. (NYSE: WTS)

Number of Hedge Fund Holders: 18

Watts Water Technologies, Inc. (NYSE: WTS) is a North Andover-based hardware firm that specializes in making products that help with the management of fluids in buildings. It operates in North America, the Asia-Pacific, Europe, and Africa. The products made by the firm include backflow preventers, water pressure regulators, temperature and pressure relief valves, and thermostatic mixing valves. Watts Water was founded in 1874 and is ranked seventh on our list of 10 best hardware stocks to buy now.

On February 8, Watts Water Technologies, Inc. (NYSE: WTS) the company declared a quarterly dividend of $0.23 per share, in line with estimates. Earlier this week, the company launched Lync, a new product that provides pre-assembled domestic hot water solutions. The firm claims that Lync reduces installation and maintenance costs for consumers.

Out of the hedge funds being tracked by Insider Monkey, London-based investment firm Impax Asset Management is a leading shareholder in the firm with 1.6 million shares worth more than $201 million.

6. Rocky Brands, Inc. (NASDAQ: RCKY)

Number of Hedge Fund Holders: 11

Rocky Brands, Inc. (NASDAQ: RCKY) is an Ohio-based manufacturer of military footwear and outdoor apparel. It was founded in 1932 and is placed sixth on our list of 10 best hardware stocks to buy now. The products made by Rocky are offered at more than 10,000 retail locations across the United States. Rocky is famous for being the supplier of footwear for the US military. However, the firm also markets itself to other industries like hotels, ranches, law enforcement, and postal employees.

Rocky Brands, Inc. (NASDAQ: RCKY) has a market cap of more than $426 million and posted an annual revenue of more than $277 million in December 2020, up from $270 million reported in 2019. On January 25, Rocky Brand announced that it would buy the footwear businesses of Honeywell International Inc. (NYSE: HON) in a deal worth $230 million.

At the end of the fourth quarter of 2020, 11 hedge funds in the database of Insider Monkey held stakes worth $15 million in the firm, up from 8 in the preceding quarter worth $13 million.

Merion Road Capital Management, in their Q1 2021 investor letter, mentioned Rocky Brands, Inc. (NASDAQ: RCKY). Here is what Merion Road Capital Management has to say about Rocky Brands, Inc. in their Q1 2021 investor letter:

“Rocky Brands (“RCKY”) was our largest position heading into the year and was also the top gainer for the quarter. I have followed and invested in the company since 2017 when new management stepped in to address some blocking and tackling missteps from the prior team (I discussed RCKY in that year’s annual letter). Today the company is a well-run boot manufacturer and distributor predominately in the work, western, and military markets. RCKY has historically traded at a discounted valuation despite two meaningful strengths. Unlike other retail, their products serve function over form which leads to stable product demand and low inventory obsolescence. Secondly, the company has successfully built a high growth B2B operation. Within this division they create specialized websites for their customers (i.e. United Airlines, Pepsi) that serve as a portal for employees to buy their work boots, be it a RCKY brand or one of their competitors. Customers prefer this as it streamlines the purchasing decision and ensures safety compliance. It’s good business for RCKY too, as they move closer to the end user and can capture a slice of the pie from competitor sales.

With the improvement of the company’s financials over the past several years, RCKY had swung from a net debt to a fairly sizeable net cash position. Management has been smart with deploying capital, be it internally (B2B operations, direct to consumer initiatives) or through share repurchases. In January they announced that they would acquire Honeywell’s outdoor boot brands, effectively doubling the size of the company. These brands appear to fit well with RCKY’s utilitarian focus and will add to their existing outdoor product lines. On their Q4 earnings call management gave the first glimpse into their rationale for the transaction. While the acquired brands have been well-run, it appears there are many opportunities for RCKY to leverage their infrastructure and operating experience. These include cross-selling, fulfillment consolidation, and growing the new brands’ direct to consumer sales. Importantly management has demonstrated their ability to be successful in these endeavors, as they mirror many of the tasks they took on a few years ago.”

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