Top Mid-Cap Industrials


The mid-cap segment of the financial markets comprises companies that tend to have market capitalizations between $2 billion and $10 billion. Put another way, the mid-cap market segment represents the middle part of the investable landscape. These are the medium-sized businesses that have typically grown slow and steady over decades and have been fortunate to move beyond the risks of survival that plagued them when there were smaller. As a group, mid-caps tend to get overlooked by both institutional and retail investors likely due to the volatility and hype that more commonly surround their small-cap and large-cap counterparts.

When it comes to the various market sectors, the same type of story is true for the group known as the industrials. Often, the industrial companies that produce capital goods used in manufacturing, resource extraction, and construction are overlooked in favor of companies from sectors such as technology or biotech. In this article, we look at several mid-cap companies from across the industrials sector and discuss why this group, while regarded as dull by some, is uniquely positioned to provide interesting investment candidates for those who are willing to move beyond the mainstream way of thinking.

Key Takeaways

  • Most mid-cap companies have been around for many years and have managed to cement a position in the market
  • The industrials sector is one of the top sectors by concentration when analyzing mid-cap stocks.
  • For those willing to do the research, companies within the mid-cap industrials sector provide investors with a unique opportunity for growth.

As mentioned, the companies within the industrial sector are primarily responsible for creating equipment, goods, and supplies that are used in business rather than selling directly to consumers. As a group, performance is often strongly connected to trends in economic cycles and is one of the sectors that is home to the largest companies in the world and is the basis for common indexes such as the Dow Jones Industrial Average.

The industrial sector has either the largest, or second-largest weighting in the mid-cap market segment, as measured by indexes such as the S&P MidCap 400 Index, Russell MidCap Index, or CRSP U.S. Mid-Cap Index. The heavy weighting toward the industrial sector could be part of the reason why the S&P 400 MidCap Index has beaten the S&P 500 and the S&P 600 by an annualized rate of 2.03% and 0.92%, respectively, between Dec. 31, 1994, and May 31, 2019.

Top Industrial Stocks Within Popular Mid-Cap ETFs

As a method to determine the top companies from within the industrials sector, we compiled the top 50 holdings from the top five mid-cap focused exchange-traded funds (ETFs), based on total net assets, was compiled, and then filtered by sector to narrow down to a master list of holdings. The list was then sorted by the amount of capital invested in each of the holdings to get a sense of each company’s concentration across the funds. The top industrial stocks from the holdings of the popular mid-cap ETFs are presented below:

· Carrier Global Corp. (CARR)
· Hubbell Incorporated Class B (HUBB)
· Tetra Tech Inc. (TTEK)
· Axon Enterprise, Inc. (AXON)
· Builders FirstSource Inc. (BLDR)
· Graco Inc. (GGG)
· Avis Budget Group Inc. (CAR)
· AECOM (ACM)
· Middleby Corporation (MIDD)
· Regal Rexnord Corporation (RRX)

Hubbell Incorporated (HUBB)

Hubbell Incorporated (HUBB) together with its subsidiaries designs, manufactures, and sells electrical products. In 2021, the company had total sales of $4.2 billion, which was up compared to $3.9 billion and $3.7 billion in 2019 and 2020, respectively. Hubbell was founded in 1888, and as you can see from the monthly chart below, the company has grown steadily over the years and has been able to handily outperform the Dow Jones Industrial Average over the past decade. Fundamentally, the company has 19,300 employees and has a market capitalization of approximately $10 billion.

TradingView.com


Tetra Tech, Inc. (TTEK) 

Tetra Tech, Inc. (TTEK) provides consulting and engineering services around the world and has a market capitalization of approximately $8 billion. Founded in 1966, the company has grown to have 21,000 associates working on solutions to complex problems in water, environment, sustainable infrastructure, renewable energy, and international development. In 2021, the company generated $3.21 billion in revenue and worked for 20,000 clients in more than 100 countries. Looking at the monthly chart, you can see that the stock has steadily outperformed the Dow Jones Industrial Average over the past decade.

TradingView.com


Axon Enterprises, Inc. (AXON)

Formerly known as TASER International, Inc., the company changed its name to Axon Enterprises, Inc. (AXON) in 2017. As many probably know, the company develops, manufacturers, and sells conducted energy devices under the TASER brand in the U.S. and internationally. However, what many may not know is that the company also operates within the area of software and sensors with products such as on-officer body cameras as well as hardware and cloud-based software to enable law enforcement to capture, securely store, manage, share, and analyze video and other digital evidence.  Combined, the company’s products have shown strong performance in recent years posting a 26% compounded annual growth rate between 2017 and 2021. Looking at the monthly chart below, you can see that AXON stock has strongly outperformed the Dow Jones Industrial Average over the previously discussed range.

TradingView.com


The Bottom Line

By their nature, most mid-cap companies have been around for many years and have managed to cement a position in the market. This group is no longer as exposed to the same type of survival risks as their smaller counterparts. In the context of the public market, there is significant room for these companies to continue growing.

As stated earlier, some of the world’s largest companies are from the industrials sector, which also happens to be the sector with the greatest concentration in the mid-cap segment.  At some point, the large-cap industrials that are now part of the iconic Dow Jones Industrial index had market capitalizations that were within the mid-cap range. It is not unreasonable to think that some of today’s top mid-cap industrials could eventually find their way into similar positions in the future.

At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.

What is the industrials sector?

The industrial goods sector includes stocks of companies that mainly produce capital goods used in manufacturing, resource extraction, and construction. The sector is closely tied to economic cycles and is the often one of the top two sectors by concentration within the mid-cap segment of the market.

What are some well-known industrial companies?

Well-known industrial sector companies include Lockheed Martin Corp. (LMT), Honeywell International Inc. (HON), and 3M Company (MMM) The industrial sector also includes companies that provide air transportation services, such as United Airlines Holdings, Inc. (UAL).

What is sector rotation?

Sector rotation is the movement of money invested in stocks from one industry to another as investors and traders anticipate the next stage of the economic cycle. For example, during a period of early recovery from a recession, investors may look to sectors such as industrials, basic materials, and energy. Conversely, during periods of late recovery from a recession, investors may look to consumer staples or services.



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