By Philip van Doorn
Even though the U.S. has passed the grim COVID-19 milestone of 500,000 deaths, the rapid decline in new cases points to a period of economic recovery as society opens.
Below are two screens of industrial companies that are expected to increase their sales considerably in the post-pandemic economy.
The Dow Jones Industrial Average (DOW:DJIA) has outperformed the Nasdaq Composite Index (NASDAQ:COMP) over the past few weeks, as rising interest rates have indicated that investors fear rising inflation .
This indicates a possible shift in investors’ sentiment to value stocks from the growth stocks that have served then well. Then again, this argument has been made repeatedly in recent years, after which sentiment has kept swinging back to rapidly growing tech companies. If you buy the “value rotation” argument, here’s a list of Wall Street’s favorite value stocks .
Before moving on to the industrial stock screens, take a look at what analysts at BCA Research call “the S&P 5.” These are Apple Inc. (NAS:AAPL) , Microsoft Corp. (NAS:MSFT) , Amazon.com Inc. (NAS:AMZN) , Google holding company Alphabet Inc. (NAS:GOOG) (NAS:GOOGL) and Facebook Inc. (NAS:FB) , which have a combined market capitalization of $7.41 trillion and a 21.4% weighting in the SPDR S&P 500 ETF Trust (PSE:SPY) . Here’s how they performed for three weeks through Feb. 25:
During that same three-week period, the Dow Jones Industrial Average (DOW:DJIA) rose 1.3%, the Nasdaq Composite Index (NASDAQ:COMP) declined 4.7% and the yield on 10-year U.S. Treasury notes (XTUP:BX:TMUBMUSD10Y) increased to 1.54% from 1.15%.
In a note to clients on Feb. 24, analysts at BCA Research wrote that “tech stocks and growth stocks are especially vulnerable to higher yields,” and that “deep cyclical sectors such as financials, industrials and materials are primed to outperform defensive stocks amid rising bond yields.”
The analysts then got a bit more nuanced, giving the opinion that cyclical stocks may be vulnerable to a near-term pullback, after which lower prices “would present an opportunity to deploy fresh cash to these sectors.”
Short-term timing for stock trades is difficult for non-professionals. The following screens take a broader view of what may happen over the next year.
Also on Feb. 24, UBS analyst Adam Scheiner wrote in a blog note that stocks have been “caught in a tug of war between higher rates and peaking demand fears versus future stimulus and a full reopening of the economy that will lead to another leg of growth and a stronger for longer cycle. We remain in the latter camp as we believe it is too early in the cycle to be worried about peak.”
Industrial stock screens
There are 73 industrial stocks in the S&P 500 Index (S&P:SPX) , but if we increase the pool to the S&P Composite 1500 Index (made up of the S&P 500, the S&P 400 Mid Cap Index (PSE:MID) and the S&P Small Cap 600 Index (S&P:SML) ), we begin with 233 industrial stocks.
Expected sales growth in 2021
The pandemic wreaked havoc for sales in certain industries during 2020.
For example, American Airlines Group Inc. (NAS:AAL) reported revenue of only $1.62 billion for the second quarter, down 86% from the second quarter of 2019. Revenue improved to $4.03 billion in the fourth quarter, but that was still down 64% from the fourth quarter of 2019. For all of 2020, revenue fell 62%. Analysts polled by FactSet expect the company’s revenue to total $25.48 billion in 2021, up 47% from 2020, but still down 44% from 2019. And you can see in the second table below that the majority of analysts polled by FactSet recommend selling the stock.
Here are the 25 companies in the S&P 1500 industrial sector that are expected to show the greatest increases in sales during calendar 2021:
Scroll the table to see all the data.
The column for changes in revenue during 2020 is marked “estimated” because many companies still haven’t reported for quarters ended Dec. 31.
Airlines dominate the list, as may be expected. If you scroll the table, you can see that for all the airlines, 2021 sales are expected to remain well below their 2019 levels. In fact, on this list of 25 best expected sales growers for calendar 2021 among the S&P 1500 industrials, only 12 companies are forecast to report higher revenue in 2021 than they did in 2019. These exceptions include Boeing Co. (NYS:BA) and Deere & Co. (NYS:DE) .
The company on this first list expected to show the greatest increase in sales for 2021 from 2019 is Generac Holdings Inc. (NYS:GNRC) .
Leaving the above group of expected sales growers in the same order, here’s a summary of opinion among Wall Street analysts. Note that for 11 of the 25, closing prices on Feb. 25 were higher than consensus price targets:
American Airlines is the only stock among the 233 in the S&P 1500 Composite industrial sector with majority “sell” or equivalent rating among analysts polled by FactSet.
Expected 2021 sales versus pre-pandemic levels
In the first list of companies expected to increase sales the most in calendar 2021 from 2020, less than half are seen producing higher revenue in 2021 than they did in 2019. Focusing only on expected 2021 sales growth would leave out FedEx Corp. (NYS:FDX) , for example, which increased its sales by 9% last year and is expected to do so again during 2021.
That points to another screen.
Here are the 25 S&P 1500 industrial companies expected to increase their calendar 2021 sales the most over their pre-pandemic sales in 2019:
One reason that a company may have increased its sales by a large amount might be that it acquired another company, or made a series of acquisitions. You can easily learn about a company’s acquisition history by reading Item 1 of its annual 10-K report, where it describes its business. Those reports can be accessed at the SEC EDGAR Database .
Here’s a summary of analysts’ opinions of this group of expected sales-growth winners for 2021 when compared to 2019:
Looking at the price targets, analysts see the most upside potential over the next 12 months for Atlas Air World Holdings Inc. (NAS:AAWW) , with a price target of $83.83 and a closing price of $56.07 on Feb. 24.
Don’t miss: These Nasdaq-100 stocks fell the most on Feb. 25