Believing in the Industrial Sector

Equities continue to close in on their 2007 highs on the S&P 500. The rally has been impressive given contraction in Europe, headwinds to consumer spending (payroll-tax holiday expiration, tax hikes on the affluent, high gas prices) and a dysfunctional U.S. political system. It is getting harder to find value with the recent run-up. Consumer staples are richly priced for value investors looking for defensive plays, and growth investors should be weary on stocks in the consumer discretionary sectors as I don't believe we have a good handle on how strong consumer spending will be this year yet.

On the brighter side, the housing market recovery seems real and construction activity is accelerating. In addition, I believe American manufacturing is gaining strength and has long-term advantages given its access to the lowest energy costs in the developed world. Investors can still find value and growth in the industrials that serve or operate in those sectors. I also believe that industrials will increasingly become a target of mergers and acquisitions given their valuation and growth prospects. M&A activity is off to its strongest start in several years, and this should continue given low financing costs, the huge amount of funds private equity firms are sitting on and the challenge larger firms have generating robust organic growth. Kohlberg Kravis Roberts' (KKR) takeover of Gardner Denver (GDI) is a good example of this activity. It's the third industrial company KKR has bought in the last few years....299 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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