In this article we discuss the 5 best automation stocks for 2021. If you want to read our detailed analysis of these companies, go directly to the 10 Best Automation Stocks For 2021.
5. Eaton Corporation plc (NYSE: ETN)
Number of Hedge Fund Holders: 41
Market Cap: $57.346 billion
Eaton is Dublin-based power management company that has become a leader in industrial automation. It provides sensors, switches, and automated factory equipment to do things such as improve power management and maintain equipment before anything breaks down. The company has signed an agreement to acquire a 50 percent stake in Jiangsu YiNeng Electric’s busway business which manufactures and markets busway products in China. The company’s quarterly earnings report shows earnings per share of $0.13 and 20.7% operating margins which was up 130 basis points in 2020 compared to the same quarter of 2019. Eaton’s 2020 revenues were $17.9 billion, and its products were used in more than 175 countries worldwide. It is one of the best automation stocks to look out for in 2021.
With a $161.5 million stake in Eaton Corp., Ken Griffin’s Citadel Investment Group owns 1.3 million shares of the company as of the end of the fourth quarter of 2020. Our database shows that 41 hedge funds held stakes in ETN as of the end of the fourth quarter, versus 35 funds in the third quarter.
Sound Shore Management, in their Q4 2020 investor letter, mentioned Eaton Corporation plc (NYSE: ETN). Here is what Sound Shore Management has to say about Eaton Corporation plc in their Q4 2020 investor letter:
“Similarly, our investment in Eaton is another great Sound Shore case study. Eaton is an electrical equipment maker that we were able to purchase in 2018 when it was trading below normal at 13 times earnings. The stock gained 31% in 2020 and outperformed its industrial peers. Over the last ten years, Eaton has methodically repositioned its business mix to a high value-add, electrical parts and aerospace business that now represents greater than 75% of operating earnings. This transformation has positioned the company well for the surge in demand for electric energy efficiency and environmentally friendly solutions. In addition, Eaton’s experienced management is focused on capital efficiency and has executed on improving organic revenue growth and improved profitability. The company is generating substantial free cash flow and has returned 6% of capital to shareholders through dividends and buybacks for the year. Even after the stock’s recent performance, it is still reasonably valued on free cash flow and remains a holding.”
4. ABB Ltd (NYSE: ABB)
Number of Hedge Fund Holders: 8
Market Cap: $66.69 billion
ABB Ltd is a Swedish-Swiss multinational corporation which is highly regarded as one of the best automation stocks today. Founded in 1883, the company is headquartered in Zurich and primarily operates in robotics, power heavy electrical equipment, as well as automation technologies. ABB is at the forefront of next-generation manufacturing equipment and recently made news for its latest satellite-mounted optical equipment that can measure the level of greenhouse gases in the atmosphere. The company has a strong robotics and discrete automation segment which develops industrial robots, robotic solutions and systems, field services, and digital services. ABB Ltd also has a strategic collaboration with International Business Machines Corporation (NYSE: IBM). In the fiscal year of 2020, the company reported a total revenue of $26.13 billion. In 2021, ABB had a high first quarter margin of 13.8% and it registered order growth of 6% in 2020 as compared to 2019. The EPS is $2.44 as reported by Yahoo Finance. According to ABB’s latest quarterly report, the Operational EBITA margin for the Group is expected to significantly improve year-on-year, to approximately 14%. All business areas are expected to increase their margin by more than 100 basis points which is in line towards the company’s 2023 targets. The sales growth for the next quarter of 2021 is expected to be 11.10%. The company seems to be on track to be one of the best automation stocks for 2021.
Our database shows that 8 hedge funds held stakes in ABB as of the end of the fourth quarter of 2020, versus 13 funds in the third quarter.
3. Intuitive Surgical, Inc. (NASDAQ: ISRG)
Number of Hedge Fund Holders: 49
Market Cap: $102.257 billion
Intuitive Surgical has become a global technology leader in robotic-assisted and minimally invasive surgery. The company designs, develops, and manufactures da Vinci surgical instruments and related accessories that are distributed in the US and across 67 countries. According to the company’s website, its surgical system was used for over 8.5 million surgical procedures in 2020. On a quarterly basis, year-over-year, procedures grew 10% in Q1 2020, decreased 19% in Q2 2020, grew 7% in Q3 2020, and grew 6% in Q4 2020. The company also launched its first venture capital fund valued at $100 million to invest in companies that share Intuitive’s vision in advancing healthcare outcomes. In February 2020, Intuitive Surgical announced its acquisition of privately held Orpheus Medical. Its stock leads its peers in terms of market value and average daily trading volume and is one of the best automation stocks for 2021. As of the Dec. 23 close of 2020, ISRG stock had risen more than 29% year to date. The company’s revenue increased to $3.4 billion in 2020, compared to $3.2 billion in 2019. By the end of 2020, ISRG had $6.87 billion in cash and cash equivalents, as stated in the company’s annual report.
As of the end of the fourth quarter, there were 49 hedge funds in Insider Monkey’s database that held stakes in Intuitive Surgical, compared to 50 funds in the third quarter. McKinley Capital Management, with 6,504 shares of ISRG, is the biggest stakeholder in the company.
Ensemble Capital, in their Q1 2021 investor letter, mentioned Intuitive Surgical, Inc. (NASDAQ: ISRG). Here is what Ensemble Capital has to say about Intuitive Surgical, Inc. in their Q1 2021 investor letter:
“Notable detractors to the Fund’s returns this quarter (included) Intuitive Surgical. Intuitive Surgical’s (6.3% weight in the Fund) growth slowed in 2020 as COVID hit the brakes on many elective surgeries. Given continued COVID-related risks in the US and Europe in 2021, it’s still unclear as to when elective surgeries recover to more normal levels. As such, hospitals may be holding off on planned surgical robot investments until demand rebounds. That said, in Asia, where COVID has been well contained, Intuitive Surgical’s procedures and systems utilizations improved, which bodes well for recovery in the US and EU. Most procedures can’t be delayed indefinitely or canceled, so we continue to expect a resumption of strong, durable growth as the pandemic recedes.”
2. Applied Materials, Inc. (NASDAQ: AMAT)
Number of Hedge Fund Holders: 61
Market Cap: $125.545 billion
Another company with the best automation stock for 2021 is Applied Materials which is a global leader in the manufacturing of tools and services for fabrication of semiconductor chips. The company provides integrated solutions such as factory automation software which optimizes productivity. The Applied SmartFactory is powered by AI based technologies that mature in high volume factories. Applied reported a revenue of $5.16 billion in 2020. On a GAAP basis, a gross margin of 45.5%, operating income of $1.28 billion, and an earnings per share of $1.22 in its latest quarterly report. CEO Gary Dickerson is enthusiastic about the company’s performance and says that their broad portfolio and exposure to technology inflections have put them in a great position to outgrow their markets in 2021.
ZWEIG DIMENNA PARTNERS is one of the 61 hedge funds tracked by Insider Monkey having stakes in AMAT at the end of the fourth quarter. The fund owns over 173,290 shares of the company.
1. Honeywell International Inc. (NYSE: HON)
Number of Hedge Fund Holders: 45
Market Cap: $158.989 billion
Being a leader in digitization, Honeywell International is at the forefront of delivering software and services that help customers in overcoming uncertain competitive pressures to achieve business outcomes. Its industrial automation and control segment provides a wide range of open control systems, software, and other related services worldwide. Honeywell has overdelivered in all guided metrics in the first quarter of 2021 according to the company’s latest issued quarterly report which has earned it the top spot in the 10 best automation stocks for 2021 list. The first quarter sales amounted to $8.5 billion which exceeded the expected range by $250 million. Honeywell also repurchased $0.8 billion worth of its own shares and has made five strategic investments. The adjusted earnings per share is $7.75 and is expected to increase up by 15 cents in the next quarter. Overall, the company reported a total revenue of $32.63 billion in 2020 with a profit margin of 14.18%.
A total of 45 hedge funds tracked by Insider Monkey were bullish HON at the end of the fourth quarter of 2020, up from 41 funds a quarter earlier.
In their Q3 2020 investor letter, Madison Investments highlighted a few stocks and Honeywell International Inc (NYSE:HON) is one of them. Here is what Madison Investments said:
“This quarter we are highlighting Honeywell (HON) as a relative yield example within Industrials. HON is a leading industrial conglomerate with an increasing focus on software and automation. We believe its global scale, history of innovation and strong culture focused on continuous operational efficiency create a sustainable competitive advantage. HON operates four segments including Aerospace, Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. These businesses serve diverse end markets including aerospace, U.S. defense contractors, e-commerce and oil and gas customers.
Our thesis on HON is that it will successfully leverage its software technology across its huge installed base of customers and products. Its installed base includes approximately 36,000 auxiliary power units, 25,000 engines, 20,000 wheels and brakes, 20,000 flight management systems and 10,000 units of communication hardware. Importantly, HON software technology is integrated into mission-critical operations of its customers including cockpit control in aircraft flights, warehouse automation in manufacturing and connected solutions in commercial buildings. We believe its technology advantage is due to above-average spending on research and development (R&D). For example, in key aerospace businesses, HON spends 4.5% of sales on R&D compared to 2-3% spending by most competitors.
The fund purchased HON in the quarter after it reached a reasonable valuation with an attractive dividend yield and relative dividend yield versus the S&P 500. At the purchase price in the upper $160s, the stock traded for less than 20x estimated earnings expected over the forward 12 months. We believe this valuation can grow over time if HON continues to innovate and create new products, while its underlying end markets like aerospace recover over time. It also has an A rated balance sheet (as rated by S&P), an absolute dividend yield of 2.2%, and an attractive relative yield of 1.3x versus the S&P 500, which is the highest relative yield since 2012, as shown below. The company also has a history of dividend increases as it has grown dividends per share by 12.5% per year on average over the last five years.
Risks to the thesis include a prolonged economic downturn that results in sustainable declines in its key end markets like aerospace. We estimate about 40-45% of sales are exposed to these end markets. Other risks include lost market share if customers don’t like its evolving software offerings, and the risk the company makes a value-destroying acquisition. We think this last risk is relatively low as HON has a history of successful acquisitions.”
You can also take a peek at George Soros’ Top 10 Stock Picks and 15 Most Valuable Cloud Computing Companies.
