The industrial complex is immense, covering everything from construction to electrical equipment, from aerospace to waste management.
Industrial stocks are the safest investment you can make. Investments in fast-growing technology and the constant expansion of market opportunities are not just a supplement, but the foundation of a profitable investment portfolio.
Industrial sector industries
Which areas can be singled out as favorable for investment?
- Aerospace and defense
- Air freight and logistics
- Construction Products
- Commercial Services
- Construction & Engineering
- Electric Equipment
- Industrial conglomerates
- Heavy Equipment
- Marine Freight
- Professional Services
- Trade companies and distributors
- Transportation Infrastructure
Economic importance of key industries
This is where Gainy's monitoring and auditing of investment ideas in the marketplace can help. For example, dynamic changes in the industrial sector and foreign trade require constant monitoring. It will reveal the degree of dependence on imports for specific commodity items and the level of loading of national industries. This will help determine the priority recipients of modernization. For example, partnerships with foreign companies may be of paramount importance in sectors where the gap between imports and domestic production must be narrowed, and where production capacity is insufficient to create an acceptable level of employment.
Targeted resource allocation will reduce weaknesses and strengthen the strengths of major industries. Their attractiveness is measured in terms of future market potential and employment, while the competitive position is assessed as market share relative to imports. It is convenient to use a portfolio analysis technique to assess the state of the industry. The idea may be to direct investment directly to those sectors that promise good consumer prospects.
The economic importance of key sectors can be assessed according to four criteria - the shares of value added in industry, industrial employment, dependence on imports and therefore attractiveness for FDI, the potential for growth, and subsequent exports (including FDI).
Dividends and Buybacks
Most of the "dividend kings" are concentrated in the industrial and capital goods sectors. These are companies that have been increasing their payouts for more than 25 consecutive years. Dividend yields on industrial sector stocks are limited, rarely exceeding 3%.
The stability of the payout ratio (the level of payouts from net profits) and the capital structure of the company will assess. A "safety cushion" guarantees a payout ratio of no more than 70%, a debt/equity ratio of no more than 80%, and a high level of "cache" and interest coverage.
In addition to paying dividends, companies implement share buybacks. This is a way to support the securities in the event of a sharp decline and an opportunity for additional shareholder remuneration. To assess the intensity of buybacks, there is a buyback yield, which is analogous to the dividend yield. To estimate the potential of a dividend increase and the scale of buyback programs, it is worth paying attention to FCF, "cache" stocks on the balance sheet, and the size of net debt (or net "cache").
Stages of development of industries
The study of the life cycle of each key industry expands the portfolio analysis. This allows the classifying of industries according to their stage of development and competitive position on three levels - in their country, on large regional markets, and on the world market. It is possible to group them into five stages - birth, growth, maturity, stagnation, and decline.
1. Military aircraft, shipbuilding, and telecommunications. Knowledge and experience provide a solid foundation for the development of new products and technologies, especially civilian ones (e.g., electronics, satellite, and terrestrial telecommunications), and help to maintain a high level of national competitiveness. Therefore, these sectors and related industries at the stages of conception and development are given priority for investment. After all, they ensure strong international competition.
2. Certain sectors (for example, oil, gas, petrochemicals), having majority shares in the domestic market and having good export potential, occupy a relatively strong position in the life cycle matrix. But to modernize and increase their international competitiveness, you need point investments. You have a pleasant risk of becoming a monopoly investor in these industries. Although they are not a priority in the allocation of FDI resources, the development of their consumer industries (e.g., special chemicals, plastics production) is necessary.
3. Some industries (ferrous and non-ferrous metallurgy) are already stable currency generators.
4. Several industries (railway transport, automobile industry, and some segments of the chemical industry) have reached the stage of maturity but require modernization by attracting a technology to improve the product. Investment flows are now increasing in the industry because products will be made based on modern technology. This will raise their international competitiveness.
5. Part of the textile and footwear industry, tailoring, and toy production have entered the stage of decline in most countries. The pressure of international competition on them, mainly from manufacturers from other major regional markets - China, India, and other "cheap" markets - is particularly noticeable.
It is advantageous to create a balance of traditional and high-tech sectors. The attractiveness of the development of traditional labor-intensive sectors (food, light industry, etc.) cannot be assessed only in terms of labor costs. Having new technology, these sectors will compete even with goods produced in less developed countries.
How to evaluate shares of the industrial sector
1. The stage of the economic cycle. Interest in industrial securities increases during the growth stage of the economy and decreases during the decline. In fact, the sector's stock performance correlates positively with economic cycles. When there are favorable trends in the economy, companies will build, produce, and transport goods.
2. Capital Costs. The high capital intensity of the business is a risk factor for cyclical companies. When the cycle changes, sometimes the investment may not pay off.
3. Revenue by geography - breakdown by regions.
4. Dynamics of prices for fuel, electricity, and timber. Allows to estimate costs and affects the company's net profit. There are futures, forward, and spot contracts.
5. Actions of regulatory bodies. On the fiscal side - infrastructure spending programs and environmental measures. On the monetary policy side - the dynamics of interest rates.
6. Volatility. Gainy monitors market trends and insider cases to assess investment risks.
The idea of investing should not end with losing money. Especially in the sound industry sector. That's why shares of industrial companies should be valued piecemeal, anticipating cash flows. An only effective analysis will help in identifying long-term trends and medium-term entry and exit zones for investing.