Why Industrial Stocks Stand Tall and Strong

Investors are dismissing weakness in data to focus on U.S. manufacturers' prospects amid domestic recovery and a revival in emerging markets

By Ben Steverman

The U.S. manufacturing sector has stepped up in a big way, leading recent advances in both the stock market and the economy. The rebound has carried such big names as Boeing (BA) and General Dynamics (GD) to their highest share prices since September 2008.

After lagging the rest of the stock market in the recession years of 2008 and 2009, the industrials on the Standard & Poor's 500-stock index have vaulted ahead of it. The industrials index is up 4.3% in 2010, more than any other sector and ahead of the flat year-to-date return for the broad S&P 500.

A weaker-than-expected economic report on Mar. 1 failed to cool investor optimism about industrial stocks. The Institute for Supply Management's manufacturing index slipped from January's 58.4, which was the highest reading since 2004, to 56.5 in February. Economists surveyed by Bloomberg News were expecting a median reading of 57.9.

Still, any ISM reading index above 50 means that manufacturing is expanding—and February was the seventh consecutive month of manufacturing growth.

The report once again confirmed that manufacturers are performing much better than other sectors, says independent market strategist Doug Peta. "It's as if manufacturing is really leading the rest of the economy," he says.

Q4 earnings have surpassed forecasts

Despite the ISM report, the S&P 500 Industrials index rose 0.96% on Mar. 1, to its highest level since Jan. 19. The index is up 7.7% in the last three weeks .

Industrial companies make widely varying products and serve vastly different end markets, yet manufacturers large and small continue to offer the stock market better-than-expected news. On average, fourth-quarter earnings for the S&P 500 industrials are 9.8% above analyst expectations, according to Bloomberg.

Bemis Company (BMS), a maker of packaging products and pressure-sensitive materials with sales of $3.5 billion last year, said on Mar. 1 that it expected 2010 earnings per share to be 3% to 11% higher than analysts were predicting.

After reporting better-than-expected earnings on Mar. 1, drilling services outfit Rowan (RDC) hit its highest price level since October 2008. "During the last few months, we've seen improving activity and tendering in virtually every jack-up [drilling barge] market," President and Chief Executive W. Matt Ralls told analysts.

big plus: customers' Low inventories

Industrials are the "favorite sector" of Uri Landesman, ING Investment Management's (ING) senior portfolio manager. Stocks in the sector remain "very undervalued," he says, and will outperform in "any sustained recovery."

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