In this article, we will discuss the 8 Most Profitable Industrial Stocks to Invest In.
Total US industrial net absorption in H1 2024 came in at 67.1 million square feet, reflecting a significant decline from the historic peak in absorption in 2021, when it was 749.3 million square feet for the year, as per historical data provided by CoStar. However, amidst the uncertainty regarding the economic outlook for H2 2024, the current NAIOP Industrial Space Demand Forecast expects that the national industrial real estate market should continue the trend of positive net absorption.
As per NAIOP, the Commercial Real Estate Development Association, total net absorption for H2 2024 is expected to be ~114 million square feet. The full-year absorption in 2025 is expected to be ~249 million square feet, and absorption in the first half of 2026 is forecast to be ~154 million square feet. With the expectation of lower rates moving forward, the potential for increased industrial leasing activity in H2 2024 and onward remains significant. With interest rates trending lower, businesses are expected to reaccelerate their capex plans that have slowed since 2022’s increase in rates.
Deal Activity in The Industrials and Services (I&S) Sector
PwC reported that the industrials and services (I&S) sector should see a steady pace of deal activity moving forward. Despite the market challenges, such as elevated interest rates and regulatory concerns, both buyers and sellers are resorting to the M&A market in a bid to drive further growth and value creation. As per PwC, in the current environment, companies continue to evaluate portfolio performance to determine whether or not they should divest non-core assets to finance strategic and corporate investments.
Deal activity in Aerospace & Defence should accelerate in H2 2024 and 2025. M&A is expected to focus on small to midsize acquisitions instead of larger deals, with companies seeking to address strategic and labour talent gaps and secure supply chains and production capacity via vertical integration. The commercial aerospace sector should continue to grow in H2 2024. PwC expects continued activity in the aircraft aftermarket segment, courtesy of aging military and commercial fleets.
Next, deal activity in the industrial manufacturing sector should accelerate in the near to medium term. This is expected to be driven by increased investor optimism about the industry and stability in the broader macroeconomic environment. Decarbonization and other environmental considerations are expected to remain the focus areas. PwC mentioned that there is a strong interest in manufacturing processes pivoting from metals to more sustainable raw materials.
For Industrial Decarbonization, International Cooperation Is a Must
As per the World Resources Institute, the industrial sector makes up for more than a quarter of total global GHG emissions, with cement and steel production making up for most of the part. In the US, the federal government announced a $6.3 billion investment, which is focused on low-emission industrial demonstration projects. The selection has been done across industrial subsectors, such as decarbonizing cement and steel plants. Also, the European Council signed off on new regulations in a bid to reduce emissions and accelerate efficiencies in industry.
World Resources Institute believes that international collaboration remains a key in achieving climate goals in heavy industries. This is because industrial products are traded throughout borders to cater to global value chains. Shared innovation and learning remain important when it comes to accelerating the deployment of decarbonization technologies.
A bustling industrial facility with a series of chemical filtration systems on display.
Our Methodology
To list the 8 Most Profitable Industrial Stocks to Invest In, we used a Finviz screener to screen for stocks from the industrial sector. After getting the list of 30-40 stocks, we narrowed our list by choosing the ones having positive net income on a TTM basis and a 5-year net income CAGR. Finally, the following 8 most profitable industrial stocks were ranked in ascending order of their hedge fund sentiments, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8 Most Profitable Industrial Stocks to Invest In
8) Saia, Inc. (NASDAQ:SAIA)
Net Income on TTM Basis: $380.7 million
5-Year Net Income CAGR: 27.52%
Number of Hedge Fund Holders: 25
Saia, Inc. (NASDAQ:SAIA) operates as a transportation company in North America.
Saia, Inc. (NASDAQ:SAIA) continues to expand its footprint, open up new terminals to increase service density and capture market share from regional and non-public carriers. As a result, the company has been tagged as one of the most dynamic players in the transportation sector. Saia, Inc. (NASDAQ:SAIA)’s strategy revolves around its ambitious network expansion plan. The opening up of new terminals should drive long-term growth and improve service density for customers.
Wall Street analysts opine that as and when the new terminals mature, they should contribute significantly to the company’s operational efficiency and profitability. The increased geographic coverage should also enhance Saia, Inc. (NASDAQ:SAIA)’s value proposition to national accounts, which should result in more lucrative and long-term contracts.
Moreover, the recent trend of nearshoring, in which companies move production closer to end markets, is expected to benefit Saia, Inc. (NASDAQ:SAIA). As businesses continue to relocate manufacturing operations to North America, there will be an increase in domestic freight movement, primarily in the LTL segment. Its expanded network places the company in an excellent position to capitalize on this trend. Saia, Inc. (NASDAQ:SAIA) might see an increase in shipment volumes and potentially improved pricing power as and when the demand for LTL services grows.
Citigroup assumed coverage on 9th October. They gave a “Buy” rating and a $518.00 price objective. Artisan Partners, an investment management company, released its second-quarter 2024 investor letter. Here is what the fund has to say:
“Among our top detractors were Lattice Semiconductor, Melrose and Saia, Inc. (NASDAQ:SAIA). Saia operates in less-than-truckload shipping, a structurally attractive area of transportation that features several solid franchise characteristics supported by real estate assets and network advantages. Given high expectations heading into its earnings release, a narrow miss largely attributable to macro weakness sent shares falling. However, we feel confident going forward for a number of reasons: industry pricing remains rational; the company continues to grow its terminal count (15–20 additions this year); the bankruptcy of key competitor Yellow in August 2023 has left a void in the market; and its valuation remains attractive, in our view.”
7) Axon Enterprise, Inc. (NASDAQ:AXON)
Net Income on TTM Basis: $290.7 million
5-Year Net Income CAGR: 81.03%
Number of Hedge Fund Holders: 36
Axon Enterprise, Inc. (NASDAQ:AXON) is engaged in developing, manufacturing, and selling conducted energy devices (CEDs) under the TASER brand in the US and internationally.
Axon Enterprise, Inc. (NASDAQ:AXON)’s long-term growth trajectory is expected to be aided by its continuous innovation in product offerings and expansion into new markets. The company made numerous strides in AI, real-time operations, and drone technology. As a result, Axon Enterprise, Inc. (NASDAQ:AXON) has positioned itself as a frontrunner in law enforcement technology. The demand for the company’s core products, like TASER devices and body cameras, is robust.
It has successfully rolled out new software categories, that continue to contribute to its software revenue growth. This diversification of product lines enabled Axon Enterprise, Inc. (NASDAQ:AXON) to maintain a healthy competitive edge in the market. The company continues to substantial inroads in international markets, with international bookings doubling YoY. Market experts opine that expansion beyond the traditional US base should open up new avenues for growth. This should reduce the dependence on a single market.
Notably, the integration of AI into software solutions should offer law enforcement agencies more sophisticated tools for data analysis and decision-making. This is expected to drive increased adoption rates and customer loyalty. Moving forward, successful expansion into international markets, a well-diversified product portfolio, and market leadership are expected to act as tailwinds.
Baird upped its price target on the shares of Axon Enterprise, Inc. (NASDAQ:AXON) from $360.00 to $400.00, giving an “Outperform” rating on 10th September. Conestoga Capital Advisors, an asset management company, released its first-quarter 2024 investor letter. Here is what the fund said:
“Axon Enterprise, Inc. (NASDAQ:AXON): This manufacturer of the TASER stun gun and body cameras has been among the top contributors to the Small Cap Composite’s total return since first added to the portfolio in 2019. Its market capitalization now exceeds $20 billion. Conestoga trimmed the position over the past few years as the market capitalization rose and, in early 2024, we fully removed AXON from client portfolios.”
6) Clean Harbors, Inc. (NYSE:CLH)
Net Income on TTM Basis: $392.8 million
5-Year Net Income CAGR: 35.90%
Number of Hedge Fund Holders: 37
Clean Harbors, Inc. (NYSE:CLH) offers environmental and industrial services in the US and internationally.
Market experts believe that Clean Harbors, Inc. (NYSE:CLH) continues to capitalize on the increasing demand for waste management and recycling. The company has a strong project pipeline, which is expected to continue into 2025. Wall Street believes that the Kimball and Baltimore expansions and recent mergers and acquisitions, which include HEPACO, should provide self-driven growth. Clean Harbors, Inc. (NYSE:CLH)’s recent expansion of the borrowing capacity with a $600 million credit facility exhibits a commitment to maintaining a strong and stable financial foundation.
Moreover, the experts remain quite optimistic about the company’s acquisition of HEPACO. The acquisition will be highly synergistic with healthy margin improvement potential. Clean Harbors, Inc. (NYSE:CLH) expects to achieve its targeted cost synergies in areas like subcontracting, branch network, asset rentals, transportation and procurement.
In H2 2024, Clean Harbors, Inc. (NYSE:CLH) is expected to witness healthy demand and momentum in its core disposal, recycling, and service businesses. In Environmental Services, its record backlog, healthy project pipeline, and demand for the broad suite of services place it well for continued growth.
Needham & Company LLC upped its price target from $235.00 to $274.00, giving a “Buy” rating on 1st August. Merion Road Capital, an investment advisor, released its Q1 2024 investor letter. Here is what the fund said:
“During the quarter I uncharacteristically built a position from nothing into our top holding. Clean Harbors, Inc. (NYSE:CLH) is the largest US hazardous waste management company. Before digging into CLH I would like to diverge with a bit of personal history. In my early 20’s I worked at Macquarie Bank where our team was responsible for acquiring investments on behalf of our managed infrastructure funds and the bank’s balance sheets. One of my first assignments was the acquisition of a publicly traded municipal solid waste (MSW) management company (Waste Industries). While not technically infrastructure per-se, MSW has similar characteristics like being an essential service, operating regional monopolies, and controlling scarce assets. In any case we paid something like 8-9x EBITDA which was a premium to the then trading multiple. Waste Industries is now a small part of GFL Environmental which trades at 12x EBITDA. And GFL is actually at a notable discount to its peers of Waste Management, Republic Services, and Waste Connectionsthat are at 15x. While hindsight is 20/20, buying into this asset class 15 years ago would have been a home-run given their strong cashflow and multiple expansion.
While hazardous waste is not entirely comparable to their MSW brethren, CLH has many attractive attributes. They own and operate scarce assets including nine incinerators and eight landfills where new supply is limited by a complex permitting process and significant construction cost. They maintain vertically integrated operations that allow it to control waste from collection through transportation and disposal; this activity similarly requires specialized permits for which the company maintains over 500. As the largest player in the space, CLH has a proven history of managing waste properly – a key consideration amongst customers given environmental ramifications. They also have scale benefits that include route-based efficiencies, capacity utilization, and the deepest breadth of service offering…” (Click here to read the full text)
5) TopBuild Corp. (NYSE:BLD)
Net Income on TTM Basis: $617.1 million
5-Year Net Income CAGR: 29.22%
Number of Hedge Fund Holders: 42
TopBuild Corp. (NYSE:BLD) is engaged in the installation and distribution of insulation and other building material products.
The company saw a strong performance in Q2 2024, with growth in sales and profits throughout its segments. TopBuild Corp. (NYSE:BLD) announced a 3.7% rise in sales to $1.37 billion. This was attributed to pricing strategies, higher volumes, and recent acquisitions. The company’s backlog remains strong, with expectations to extend into 2025. The company announced a new $1 billion share repurchase program and made $280 million in acquisitions over the previous 18 months.
TopBuild Corp. (NYSE:BLD) expects fiberglass supply to improve in H2 2024 and is confident about covering price increases. The company highlighted that, in Q2 2024, productivity initiatives and management of underperforming branches aided its profitability. Furthermore, it expects that a strong bidding activity will continue, despite project delays in commercial segments. TopBuild Corp. (NYSE:BLD) wrapped up 6 acquisitions in 2024, adding more than $100 million in annual revenue.
The company recently acquired Texas Insulation, which expands TopBuild Corp. (NYSE:BLD)’s spray foam capabilities in an important and growing geography. This acquisition further demonstrates its opportunities around making acquisitions in the core area of insulation. TopBuild Corp. (NYSE:BLD)’s long-term fundamentals remain strong, aided by the undersupply of housing in the US, increasing household formations, the potential for moderating interest rates, and healthy demand for greater energy efficiency.
Analysts at Jefferies Financial Group increased their price target on the shares of TopBuild Corp. (NYSE:BLD) from $486.00 to $536.00, giving a “Buy” rating on 17th July.
4) Caterpillar Inc. (NYSE:CAT)
Net Income on TTM Basis: $11.007 billion
5-Year Net Income CAGR: 11.89%
Number of Hedge Fund Holders: 49
Caterpillar Inc. (NYSE:CAT) is engaged in designing, manufacturing, and marketing construction, mining, and forestry machinery.
Market experts opine that an extensive breadth of products and intangible assets should continue to act as principal growth drivers for Caterpillar Inc. (NYSE:CAT). The power generation industry, primarily for data centers, is expected to sustain a strong demand for reciprocating engines and solar turbines. Moreover, Caterpillar Inc. (NYSE:CAT) anticipates healthy growth in high-speed marine and rail services. The company’s investments in new technologies and services continue to emphasize supporting customers in achieving climate goals. This is expected to position the company favorably as industries have been prioritizing sustainability.
Caterpillar Inc. (NYSE:CAT)’s strategic initiatives and healthy cash flow management are expected to help the company tackle challenges in the competitive market. BofA Securities has an optimistic outlook on the mining industry, hinting at the strong demand for Caterpillar Inc. (NYSE:CAT)’s products and services.
Furthermore, Caterpillar Inc. (NYSE:CAT) launched the Dynamic Energy Transfer system for large mining trucks, which aims to reduce operating costs and greenhouse gas emissions. The company’s strategic initiatives and robust cash flow management, together with its commitment to operational efficiency and sustainability in the mining industry, should continue to help its growth trajectory.
Citigroup upped its target price from $380.00 to $445.00, giving a “Buy” rating on 9th October. Diamond Hill Capital, an investment management company, released its second-quarter 2024 investor letter. Here is what the fund said:
“Other bottom Q2 contributors included Caterpillar Inc. (NYSE:CAT) and Home Depot. Shares of heavy construction machinery manufacturer Caterpillar fell as dealer inventories have declined and the market wrestles with concerns construction activity may be decelerating.”
3) Deere & Company (NYSE:DE)
Net Income on TTM Basis: $8.224 billion
5-Year Net Income CAGR: 19.92%
Number of Hedge Fund Holders: 50
Deere & Company (NYSE:DE) is engaged in the manufacture and distribution of various equipment worldwide.
Deere & Company (NYSE:DE) remains proactive when it comes to cost management and operational efficiency. The company implemented strategic headcount reductions as part of the operational adjustments. Furthermore, the company’s commitment to innovation and technological advancements are the key focus areas. Its product changeovers and technological ambitions continue to influence workforce changes and operational strategies. This push towards advanced technologies should help the company maintain a competitive edge amidst an evolving landscape.
Deere & Company (NYSE:DE)’s strong brand equity, together with its leading technology stack, offers significant competitive advantages. Wall Street is quite optimistic about the company’s continued investment in technological innovations, mainly in precision agriculture and autonomous equipment.
Moreover, the integration of AI, machine learning, and IoT in the products is expected to result in improved efficiency for customers. This could potentially justify the premium pricing and drive higher margins. Overall, strong market position in key product segments, effective and disciplined cost management, and operational efficiency are expected to aid its growth momentum.
Citigroup upped its price objective on shares of Deere & Company (NYSE:DE) from $395.00 to $420.00, giving a “Neutral” rating on 9th October. Parnassus Investments, an investment management company, released the second quarter 2024 investor letter. Here is what the fund said:
“Deere & Company (NYSE:DE) stock dropped after the company released underwhelming fiscal second-quarter earnings and lowered its 2024 guidance. Although the company is going through an equipment demand downturn, we believe it will demonstrate better-than-expected through-cycle performance.”
2) FedEx Corporation (NYSE:FDX)
Net Income on TTM Basis: $4.047 billion
5-Year Net Income CAGR: 55.16%
Number of Hedge Fund Holders: 59
FedEx Corporation (NYSE:FDX) offers transportation, e-commerce, and business services in the US and internationally.
Wall Street analysts are quite optimistic about the company’s DRIVE program, which is a comprehensive cost-reduction initiative. FedEx Corporation (NYSE:FDX) has been undertaking numerous significant strategic moves, which are focused on streamlining its operations and enhancing shareholder value. For example, the merger of its Express and Ground network operations in the US, which forms part of its Network 2.0 strategy, should improve margins and capital efficiency.
Wall Street believes that e-commerce remains the significant growth driver for FedEx Corporation (NYSE:FDX). Notably, the recent trends provide unexpected support, primarily from Chinese outbound volumes. The merger of Express and Ground operations is expected to unlock opportunities to optimize route planning, reduce redundancies, and improve asset utilization. This consolidation is expected to result in more flexible and responsive service offerings. Therefore, it should enable FedEx Corporation (NYSE:FDX) to better compete in the evolving e-commerce landscape and capture the market share.
The company’s innovative approach to network optimization, diversified service offerings throughout multiple segments, robust global brand recognition, and extensive network should act as competitive advantages.
Citigroup initiated the coverage on the shares of FedEx Corporation (NYSE:FDX), issuing a “Buy” rating and a $301.00 price objective. Longleaf Partners, managed by Southeastern Asset Management, released its second quarter 2024 investor letter. Here is what the fund said:
“FedEx Corporation (NYSE:FDX) – Global logistics company FedEx was the top contributor for the quarter. Late in the quarter, FedEx reported strong fiscal year results, highlighting a year of strong cost management in a challenging revenue environment. Earnings per share (EPS) increased by 19%, and reduced capital expenditures narrowed the gap between EPS and FCF per share. With the increase in FCF, the company has become a significant share repurchaser, which is a welcome change. The company also announced a strategic review of their Freight segment. Our appraisal has long accounted for the underappreciated value in FedEx’s less-than-truckload operations. A potential spin-off or sale could unlock substantial value, as comparable companies like Old Dominion trade at significantly higher multiples on revenue, cash flow, and earnings than those applied to FedEx Freight by the market and our appraisal today.”
1) Builders FirstSource, Inc. (NYSE:BLDR)
Net Income on TTM Basis: $1.405. billion
5-Year Net Income CAGR: 43.91%
Number of Hedge Fund Holders: 59
Builders FirstSource, Inc. (NYSE:BLDR) manufactures and supplies building materials, manufactured components, and construction services to professional homebuilders, sub-contractors, and consumers in the US.
Wall Street analysts believe that Builders FirstSource, Inc. (NYSE:BLDR)’s key strength lies in the robust balance sheet, that offers significant financial flexibility. As of March 31, 2024, it reported a low net leverage of 1.1x, placing it well for potential strategic moves. The company has a strong potential for significant capital deployment, which includes share buybacks and M&As.
The fragmented nature of the market offers significant opportunities for consolidation, and Builders FirstSource, Inc. (NYSE:BLDR)’s healthy financial position should enable it to capitalize on such prospects. Therefore, a strong market position, the ability for effective capital deployment, and diverse product and service offerings are expected to provide long-term revenue growth opportunities. The company completed 3 acquisitions and initiated a new $1 billion share repurchase plan.
In June, it acquired RPM Wood Products, which improves its ability to serve high-end custom builders in Northeast Florida. Builders FirstSource, Inc. (NYSE:BLDR) targets $1 billion in incremental sales by 2026 via its digital platform and it plans to focus on profitable market share growth and efficiency. The company expects a rebound in the multi-family sector in 2025.
Loop Capital increased its target price on the shares of Builders FirstSource, Inc. (NYSE:BLDR) from $190.00 to $230.00, giving a “Buy” rating on 20th September. Black Bear Value Partners, an investment management firm, released its Q3 2024 investor letter. Here is what the fund said:
“Builders FirstSource, Inc. (NYSE:BLDR) is a manufacturer and supplier of building materials with a focus on residential construction. Historically this business was cyclical with minimal pricing power as the primary products sold were lumber and other non-value-add housing materials. Since the GFC, BLDR has focused on growing their value-add business that is now 50%+ of the topline. The company has modest leverage and has been using their abundant free-cash-flow to buy in over 41% of the stock in the last ~3 years.
While mortgage rates are higher, they are not unusual versus history. The low rates of the last 5-10 years are the outlier. We have a structural shortage of housing in the USA. With existing homeowners locked into low-rate mortgages, the aspiring homeowner may increasingly need to find a home from a homebuilder.
Normalized free cash flow per share looks to be in the range of $13-$16 per year. Margins are structurally higher given their increased shift into value-add products. At quarter end pricing of ~$194 that implies a free-cash-flow yield of 7-8% which does not reflect the long-term housing needs or their pricing power.”
While we acknowledge the potential of BLDR as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than BLDR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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