S&P recommends marketweighting the S&P 500 Industrials sector. Year to date through November 18, the S&P Industrials Index, which represented 10.6% of the S&P 500 Index, was down 6.3%, compared to a 3.3% decline for the S&P 500. In 2010, this sector index advanced 23.9%, versus a 12.8% increase for the 500. There are 18 sub-industry indices in this sector, with Aerospace & Defense being the largest at 24.9% of the sector’s market value.
S&P analysts have a positive fundamental outlook on the Industrials sector due to expected sales benefits from rising emerging market exposure, although Europe’s debt crisis has increased uncertainty, in our view. In addition, operating leverage is rising with revenues thanks to aggressive cost-cutting initiatives put in place by most companies during the extreme business downturn of 2008 and 2009. According to Capital IQ, from a valuation standpoint, the sector trades at 11.8X consensus estimated 2012 EPS, above the market’s 11.3X, due to above-average EPS visibility, in our view. Its P/E to projected five-year EPS growth rate of 0.9X is lower than the broader market’s 1.1X. The sector’s marketweighted S&P STARS average of 3.7 (out of 5.0) is slightly below the 3.8 average for the S&P 500.
See List of Best Dividend Stocks for 2012 - Industrial Sector.