By James Brumley
In late November, I dissected the current and projected valuations for all the major sectors, further breaking them down by market cap. The purpose of the exercise was to pinpoint which slivers of the market were the best-positioned to make big gains in 2013, since as much as 40% of an individual stock's performance is ultimately attributable to its sector's performance.
Although a handful of sector/market cap groups stood out as winners, one group in particular was an obvious "must have" for 2013: Mid-cap industrial stocks.
Yes, many of the stocks in this segment of the market are not only boring, but also unfamiliar to many investors. But that's OK -- boring, obscure stocks are often the ones that quietly dole out the biggest rewards.
With that in mind, here are the top three picks from the group that investors should consider buying as they head into the new year:
1. Triumph Group (NYSE:TGI)
Triumph Group Inc. is an aerospace and defense contractor. But the company is also a manufacturer and a designer, catering to the public sector as much as the private, and making just as much hardware for new aircraft as it does to maintain older planes. But the most compelling aspect of this company is found on its income statement.
In each of the past 11 quarters, Triumph Group has topped earnings estimates. Last quarter, for instance, the company beat estimates of $1.33 by earning $1.57 per share. In the quarter before that, Triumph earned $1.48, leaving expectations of $1.28 per share in the dust.
Looking ahead, analysts expect the contractor to grow the bottom line by 22% per year. Given the strong growth trend already in place though, in addition to a very palatable trailing price-to-earnings (P/E) ratio of 10.9, this boring little contractor is simply too underestimated.
2. URS Corp. (NYSE:URS)
URS Corp. isn't even close to being a household name, but the company designs, builds and maintains all sorts of large-scale equipment and facilities for some well-known companies, and even government agencies and the military. Some recently-awarded projects include the construction of a mine-tailings processing facility for Freeport-McMoRan Copper & Gold (NYSE:FCX), a maintenance contract for some of the U.S. Army's radar equipment, and a contract with the U.S. Department of Energy to properly manage the radioactive waste from the department's nuclear power plant in Idaho. Those three projects alone could create nearly $1 billion in business for URS Corp.
It's still all rather mundane stuff, but like Triumph, there's nothing mundane about its balance sheet. URS has grown the bottom line every year since 2007, with only one minor exception in 2011, when earnings fell from $3.54 per share in 2010 to $3.53 per share the next year. The company is back on track though, on pace to earn $4.27 per share this year. That 21% growth forecast versus the forward-looking earnings multiple of only 8.6 makes this stock a hidden bargain.
3. Trinity Industries Inc. (NYSE:TRN)
As was the case with Triumph Group and URS Corp., Trinity Industries has more than one business line. However, its ventures can be narrowed down to two basic industries: Transportation and infrastructure engineering. It makes everything from railroad cars and barges, to highway guardrails and wind-turbine towers. None of it is riveting, but all of it is necessary.
Also like URS and Triumph, Trinity Industries has a fundamental pedigree that makes it buy-worthy: The forward-looking P/E is a mere 9, and earnings are forecast to grow more than 16% next year. Trinity fell short of revenue as well as earnings estimates last quarter, but sales were still up 18% compared with last year, and per-share earnings were higher by 90%. As for the catalyst that really could jolt Trinity shares out of what's now almost a two-year slump, don't worry -- it's likely on the way.
Although rail cars deliveries are expected to fall 15% in 2013 compared with 2012's levels, by 2014, sales of railroad cars are expected to exceed 2012's total by more than 22%. Simultaneously, if the United States is going to recover at all, this rebound is going to have to materialize in 2013. Those converging trends will put all of Trinity's businesses into high gear.
Risks to Consider: As strong as any industry or corporation can be, no company is completely immune to setbacks. The primary risk these three stocks face is the same most other companies face: A broad economic slowdown.
Generally speaking, one stock from a single sector/market-cap group would be enough to fill a hole in a portfolio, while two stocks from that group would be overkill. In this particular case though, these three stocks are different enough from one another that owning a piece of all three wouldn't be redundant.
Investors who only have room for one new pick, however, should consider Triumph Group first. It's proven the most consistent of the three and is highly diversified. Shareholders willing to sit tight for at least a year could realistically find themselves up 30%, if not more, by this time in 2013.
Additional disclosure: StreetAuthority LLC owns shares of FCX in one or more of its “real money” portfolios.