As I wrote yesterday, the technology sector has been on fire this year.
Unfortunately, it’s off to a rougher start this week.
Now that the initial post-IPO fever has passed, SpaceX (SPCX) is coming back to Earth… and taking much of the tech sector with it. SPCX shares fell 16% yesterday, while the broader tech-heavy Nasdaq dropped 1.3%.
So, what should we make of this? Did the SpaceX IPO mark the market top?
It’s far too early to say. I’ve been doing this long enough to know better than to call a top. But I do know this. Trillions of dollars are being committed to AI infrastructure spending in the years ahead.
And that money won’t all be spent on Nvidia (NVDA) chips, hard drives and memory. Vast sums will flow into the real economy, funding the physical backbone that makes the digital world possible.
I explored this theme last week in our sector X-ray of the materials sector. Today, we’re turning our attention to industrials.
Let’s see what my system has to say about the prospects for the gritty underbelly of the AI economy.
My system is telling us that it’s important to be choosy here. Only 17 of the 69 industrial sector stocks rate “Bullish,” meaning a score of 60 or higher out of 100. (For those new to my Green Zone Power Ratings system, “Bullish” rated stocks outperform the S&P 500 Index by double on average over the following year.)
Another 25 rate as “Neutral,” meaning my system would expect them to perform more or less in line with the broader market. Fully 27 rate as “Bearish.”
So, where might the opportunities lie? Let’s keep digging to find out.
Where Do Industrials Pick Up Points?
The Green Zone Power Rating system is a composite score based on six primary factors: momentum, size, volatility, value, quality and growth, each of which comprises several sub-factors. (As we are looking at large-cap constituents of the S&P 500, I don’t consider size when doing the sector X-ray.)
Let’s take a look to see where industrial stocks pick up points.
As with materials last week, the single most “Bullish” factor is quality. And as I wrote then, that’s a little counterintuitive.
My quality factor tends to reward “capital light” businesses that throw off a lot of cash with minimal investment in physical property, plant and equipment. Industrial stocks are by their very nature capital heavy.
So, then, how do we explain the high-quality ratings on so many industrial stocks?
It comes down to profitability. These companies are enjoying bumper profits due to the AI buildout boom, which more than compensates for the asset heaviness.
It’s worth noting that more than half also rate as “Bullish” on their growth factor. That makes sense. The companies building out the physical infrastructure of the AI boom have been enjoying a surge in sales.
If industrials have a weakness, it’s that they’re a little on the expensive side. Only nine currently rate as “Bullish.”
Highest-Rated Industrials
I mentioned earlier that we needed to be choosy when investing in this sector. So, I narrowed it down to the 10 industrial stocks with the highest overall Green Zone Power Rating. Let’s give that list a look.
The top name – shipping behemoth FedEx Corp (FDX) – needs no introduction. It’s one of the largest delivery and logistics giants in the world. It also happens to be the only stock on the list that rates as “Bullish” on all of its individual factors.
FedEx has no shortage of competition these days. Apart from traditional competitors like United Parcel Service (UPS), Amazon (AMZN) is a legitimate rival now that it’s opened up its logistical operations to third parties.
Still, my system is clear. The stock rates as “Bullish” across the board. Competition or not, FDX is firing on all cylinders.
While FedEx is attractive, it’s by no means an AI infrastructure play. Let’s focus on the companies best positioned to benefit from that megatrend.
EMCOR Group (EME) and Comfort Systems USA (FIX) have both established profitable niches installing cooling systems and other critical infrastructure in data centers. They’re classic “picks and shovels” plays on the AI boom. And Wall Street has taken note…
EME and FIX both rate exceptionally well on their momentum factors, with “Bullish” factor ratings of 75 and 97. Both also rate exceptionally well on their growth and quality factors, with “Strong Bullish” factor ratings starting in the 90s.
Heavy machinery maker Caterpillar (CAT) also made the cut. Frankly, I would have been surprised if it didn’t.
Virtually every construction site the world over depends on Caterpillar equipment, and data centers are no exception.
Caterpillar rates as “Bullish” on every factor except value. It’s a wonderful company… and investors are pricing it accordingly.
To good profits,
Adam O’Dell
Editor, What My System Says Today
