Want to know what's tough? I mean, really tough? Industrials.
This sector is hard to crack. So is the question of how exposed I want to be to the group going into 2021. I mean, there really is a lot of diversification just within the sector.
And, no, I'm not only talking about the Dow Jones Industrial Average, which is up just about 5% for 2020, badly underperforming the S&P 500, and the Dow Transports -- while not even belonging on the same playing field as the tech-heavy Nasdaq Composite and Nasdaq 100.
I'm going to start here by looking at the "diversified industrials."
With its excellent balance sheet, Honeywell is probably the "best in class" name in this group. In addition, it's exposed everywhere, including aerospace, building technologies and safety and productivity. GE, on the other hand, is the comeback name in the group, with more upside risk than downside risk. The success of this name really depends on free cash flow and a CEO named Larry Culp, who just happens to really know just what the heck he is trying to do. Knowing what I am trying to do, by the way, has always been a goal of mine. So, this is a compliment above most others.
Now that we mentioned aerospace, let's go there.
What kind of shape will this group be in going forward? It all really depends on just how much fiscal policy -- not just here in the U.S., but among allied nations -- goes their way. I gave up on my long-time fave Lockheed Martin (LMT) - Get Report over the summer, and so far that was a good out. My current longs in the space are Boeing (BA) - Get Report, for obvious reasons, and Raytheon (RTX) - Get Report, as I had been long United Technologies and decided to stay long the successor.
Boeing is the one that I am currently most excited about, as we are currently up 56% in that position. The obvious part of this one is that it is not just a defense play. As economies reopen, civilian air travel may never return to where it was, but there will be a recovery, and the 737 MAX certainly seems very close to returning to a level of broad, global recertification.
That brings us to the transports, which are really a sub-industry of industrials.
To discuss this group, let's start with three questions. First, what does well in this pandemic economy? That's delivery services. What does well in a reopened economy? The rails, airlines, and delivery services. Who is going to get the vaccines to where they have to go? The Army, the airlines and delivery services. Notice that delivery services are part of each?
I am long United Parcel Services (UPS) - Get Report, but I certainly don't think being long FedEx (FDX) - Get Report is a mistake. I mean, I have not even brought up that this is the holiday season and e-commerce is off to an incredible start. Then, throw in that the Army will need help from the private sector to move the vaccine, and I think these two firms are going to have a great next six to nine months.
The airlines will have to help with the vaccine distribution and they will be grateful for the business. But here's the catch: I really do not expect to get on a plane for a long time, and I bet a lot of folks feel the same way I do. Even with federal help, this industry is going to struggle.
My only long in the space is Southwest Airlines (LUV) - Get Report, as that firm has always been well-managed. Also, LUV's business is entirely domestic in nature. Let's face it: Domestic travel will recover long before international travel is ever going to be cool again. I think staying away from global travel is playing it safe for now.
The big names in this group are Caterpillar (CAT) - Get Report and Deere Corp. (DE) - Get Report. Both are good ways to bet on improved trade conditions between the U.S. and China. But when It comes to China, President-Elect Joe Biden is starting to sound like President Donald Trump, which means that these names could be set up for a fall. I am not in the name, as of yet, but Terex (TEX) - Get Report might just be a lower-priced way (less downside risk) to play the heavy vehicle space.
Finally, here are my Top 5 industrial-related names for the new year. I may be right. I may be wrong. But I am long all five with my own money.
2) United Parcel Service
4) Southwest Airlines
5) General Electric
Stephen “Sarge” Guilfoyle writes on stocks and the markets each trading day for Real Money, TheStreet’s premium site, including his popular Market Recon column every morning. Guilfoyle is also co-portfolio manager of TheStreet’s Stocks Under $10.
At the time of publication, Guilfoyle was long HON, GE, BA, RTX, UPS, LUV equity.