Industrial Stocks Soar Past Broader Market

BOSTON (TheStreet) -- Industrial companies such as Caterpillar(CAT) and Honeywell(HON) have outperformed the broader stock market as manufacturers' order books fill up from customers in the U.S. and emerging markets. With earnings growth expected by analysts to exceed all but one sector, there may be more gains ahead.

During the two-year span when the S&P 500 rallied 93%, the Industrial Select Sector SPDR ETF(XLI) outperformed with a 116% gain. The ETF comprises large-cap industrial companies such as General Electric(GE), United Technologies(UTX) and Caterpillar.

As the chart of economic data below shows, it hasn't been an easy ride for industrials over the past 12 months. For most of the summer, the Industrial Select Sector SPDR ETF had lost value, which corresponded with declines in manufacturing jobs and a regional manufacturing slump. Since then, though, industrial stocks have been on a steady rise as the economy found its footing. Last month, the Institute for Supply Management's manufacturing index hit its highest point since May 2004.

Another bright sign for the industrials group is that job growth has been strong in the past few months. Manufacturing jobs increased by 53,000 in January and 33,000 in February, according to the Labor Department's nonfarm payrolls report. Manufacturing has added 195,000 jobs since December 2009, and durable goods manufacturing added 233,000 jobs during that same period.

As oil remains elevated above $100 a barrel, investors have become concerned with the impact on these industrial stocks, especially transportation companies such as FedEx(FDX) and UPS(UPS).

On the positive side, analysts are projecting strong earnings growth over the next two quarters. Thomson Reuters estimates that industrials will have earnings growth of 24.3% in the first quarter, which ranks second only to materials (34.4% growth expected) and even outpaces energy companies (19.2% growth expected). In the second quarter, analysts polled by Thomson Reuters expect 14.4% earnings growth for industrials, coming in third behind materials and financials.

Given the sector's tremendous rally and where valuations currently sit, it has been harder for investors to pick which industrial names will outperform. Based on analysts' recommendations, some stocks and specific sub-sectors look more attractive than others. TheStreet details these sub-sectors over the following pages and looks at which stocks analysts are favoring.