The rally in tech stocks that lifted the broader market is falling victim to the dog days of August. Investors looking to make a pivot away from overvalued tech stocks may want to look at undervalued industrial stocks.
You won’t find any industrial stocks in the “Magnificent 7” stocks that led the market rally earlier this year. But industrial stocks are magnificent in their own way, if you’re a fan of companies that deliver consistent growth over time.
The industrial sector contains some of the oldest, and most respected, companies in the world. What they lack in style, they make up for in substance.
These companies make up the backbone of the U.S. and global economy. It’s not an understatement to say the economy couldn’t perform without the products and services these companies provide. And many industrial stocks offer reliable dividends to go along with reliable revenue and earnings.
That’s an evergreen formula for investors who are looking for a total return that beats fixed-income investments. But industrial stocks will also appeal to growth investors when they are trading at a discount to their intrinsic value. With that in mind, here are seven undervalued industrial stocks to buy for growth in a volatile market.
Deere & Company (DE)
Deere & Company (NYSE:DE) reminds investors that price is what you pay, and value is what you get. Shares of DE stock don’t come cheap.
You’ll pay around $420 per share at the time I’m writing this. The stock is commanding a high price because of the company’s position in robotics and artificial intelligence (AI).
But does that make Deere expensive? Not necessarily. For starters, the stock is currently trading at around 13.3x forward earnings. That’s low compared to the overall sector and to the P/E ratio of DE stock in the last five years.
Deere is also a favorite of industrial investors. Over 70% of the stock is controlled by the major institutions, and for the last several quarters, buyers have outnumbered sellers by almost two to one.
That’s probably why 18 out of 26 analysts who have rated DE stock in the last three months give the stock a Strong Buy or Buy rating. Their consensus buy target is $456.32 per share.
That’s about an 8% gain from the stock’s current price. And investors also get a dividend that currently pays $5 per share annually. That dividend has been growing for several years.
Crown Holdings (CCK)
Crown Holdings (NYSE:CCK) is one of the world’s leading manufacturers of aluminum cans. As the world looks for sustainable solutions what’s old has become new again. Namely, we’re moving away from plastic bottles and tapping into old-school aluminum cans.
That may not be as exciting as investing in the hottest AI stock. Still, it’s something to think about when considering undervalued industrial stocks while you’re drinking your favorite flavored mineral water … in an aluminum can.
CCK stock is down 1% in the last month, which is a slight pullback from the stock’s 6.7% growth so far in 2023. This is likely a reaction to the company’s earnings. Crown missed on the top line and both revenue and earnings were down YoY.
Analysts still believe earnings will climb by 16% next year. There’s a good chance that’s not being priced into CCK stock right now. But analysts are forecasting a 17% upside in CCK stock, so now is an excellent time to take a position.
Avery Dennison (AVY)
Avery Dennison (NYSE:AVY) is next on this list of undervalued industrial stocks. AVY stock is down right around 2% in 2023 and 11.7% in the last 12 months.
The company’s most recent earnings report is weighing on AVY stock. The leader in materials science missed on revenue and earnings. But the commentary in the earnings call may have soured investors.
Management said it underestimated the weakness in demand and was still working to right-size its inventory.
That being said, the company did report higher margins despite the lower volume. And analysts are projecting earnings growth of nearly 20% in the next 12 months. That’s a formula that will work well for investors.
Avery Dennison is a little expensive at about 22x forward earnings. But if the earnings projections are realistic, the stock price will catch up. Of the 14 analysts that have rated AVY stock in the last three months, 11 give the stock either a Buy or Strong Buy rating.
Johnson Controls International (JCI)
Johnson Controls International (NYSE:JCI) is one of the few pure plays in the Internet of Things (IoT) sector.
In fact, investors will also get some exposure to artificial intelligence when they invest in JCI stock.
That focus on technology is one reason JCI stock is down over 7.5% in 2023 and 4.5% in the last month. However, Johnson Controls makes this list of undervalued industrial stocks because of a recent innovation that may not be priced into the stock.
The company’s OpenBlue platform is an AI-powered platform that provides “remote diagnostics, predictive maintenance, compliance monitoring, remote risk assessments, and more.”
This platform has a large addressable market across a range of industries. That growth opportunity is likely why analysts forecast a 14% jump in earnings next year.
Speaking of the analysts, 17 out of 23 give JCI stock either a Buy or Strong Buy rating with a price target of $74.25, more than 20% above the stock’s price as of August 17.
Xylem (XYL)
One of the appealing aspects of investing in industrial companies is that they produce essential products. That’s the case with Xylem (NYSE:XYL).
The company designs, manufactures, and services engineered products and solutions for the water and wastewater industries.
The demand for the company’s services can be summed up in one statistic. The average water main in the United States may be up to 50 years old. That makes them prone to leaks which is a problem that Xylem helps address. In 2023, that makes Xylem a candidate for environmentally conscious investors.
A forward P/E ratio of 27x doesn’t make Xylem dramatically undervalued. However, analysts are forecasting 18% upside for XYL stock.
At first glance, Xylem doesn’t have an impressive dividend with a yield of just 1.32%. However, the company has increased its dividend for 12 consecutive years. If earnings growth comes in as expected, that growth is likely to continue, as will the payout per share which is currently $1.32.
Dover Corporation (DOV)
Dover Corporation (NYSE:DOV) is the kind of company that comes to mind when you think about an industrial stock.
The company’s list of products and services won’t light up investors in the same way that generative AI currently does. But they are just as essential.
Like many companies on this list, Dover missed on earnings in its most recent quarter and the results were also lower YoY. That reflects an economy that is slowing down. But as the economy recovers, Dover is one company that will benefit.
Dover has a forward P/E ratio of just 15x and analysts forecast 9.9% earnings growth and a 16% growth in the DOV stock price. And that growth comes with one of the safest dividends in the industry. Dover is a Dividend King that has increased its dividend in each of the last 68 years.
Axon Enterprise (AXON)
Axon Enterprise (NASDAQ:AXON) won’t be the first name you think about if you’re looking for undervalued industrial stocks.
For starters, it’s the only stock on this list that trades on the tech-heavy NASDAQ exchange.
The company offers a portfolio of law enforcement technology solutions that work together to support its vision to “cut gun-related deaths between police and the public by 50% in 10 years.”
The company forecasts a $50 billion total addressable market with a growing base of recurring revenue from SaaS products.
Public safety may not be the primary issue in the 2024 election, but it’s going to be a significant part of the conversation. And Axon has the products and services for state and local governments who will be looking for solutions that support both public safety and new-age policing,
Traditional fundamentals suggest that AXON stock may be overvalued. But if the company makes good on forecasts for 36% earnings growth, the stock will have room to grow into its valuation.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
