Like the materials sector, industrials have been a dog for investors this year. Industrial companies in the S&P 500 are down 5.6% this year through Nov. 10, according to Capital IQ, the third worst sector performer this year. Unsurprisingly, hedge funds sold off shares of industrial stocks during the quarter.

While much of the selling was scattered across different subsectors, the group of industrials stocks that frequently popped up were the railroads. Vinik Asset Management, Soros Capital, and Caxton Associates sold stocks like CSX ( CSX), Norfolk Southern ( NSC) and Union Pacific ( UNP). These stocks sold off sharply from the beginning August through September. Since the end of the third quarter, though, these names are up between 15% and 25%.

Railroad companies weren't the only transportation names sold during the quarter. Vinik also sold shares of both FedEx ( FDX) and UPS ( UPS), while Third Point dumped shares of Swift Transportation ( SWFT). Soros also sold shares of FedEx, while Omega Advisors lightened up on United Continental ( UAL).

There were some buyers of industrial companies during the quarter. Och-Ziff picked up a basket of industrial stocks like United Technologies ( UTX), Emerson Electric ( EMR), Caterpillar ( CAT), General Electric ( GE) and Deere ( DE). Highbridge Capital added shares of Parker-Hannifin ( PH) and Honeywell ( HON).

It remains to be seen whether those industrial bets pay off, but for now analysts are looking positively on the sector. According to FactSet Research, industrial companies in the S&P 500 should see earnings grow 13% next year, tied with consumer discretionary for the second highest growth rate for any sector. But with industrials sales up only 9% in the third quarter from a year ago and share prices slipping during August, it's easy to see why some chose to cut and run from the sector.

The outlook for consumer discretionary stocks seems to be bright. After earnings grew a solid 16% during the third quarter from a year ago, the sector is tied with industrials for second overall with an expected earnings growth rate of 13% in 2012.

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