Stocks in the industrials sector are poised to benefit from a number of recent trends, says Fidelity’s Dan Kelley, who thinks demand will increase amid heightened geopolitical risk, a push to build more products closer to home, and recent federal legislation, among other meaningful drivers.
“The war in Ukraine and mounting geopolitical risk have made countries more focused on their own safety, boosting demand for the products and services offered by companies in the industrials sector, including aerospace and defense equipment,” says Kelley, portfolio manager of Fidelity® Puritan® Fund (FPURX).
Deglobalization also is a factor, according to Kelley. “We didn't want to build more factories in the U.S. when labor was cheaper overseas and gave us better access to new markets, but now that has shifted,” he explains.
In addition, the Inflation Reduction Act (IRA) of 2022, landmark U.S. legislation passed in August 2022, is likely to spur more appetite for many industrial products, including energy-efficiency equipment, according to Kelley.
In managing the fund since 2018, Kelley has sought income and capital growth consistent with reasonable risk. The fund has a neutral allocation of 60% equities and 40% bonds.
Kelley says he’s found many industrials stocks that fit well with his “mispriced growth” strategy—that is, those he believes look mispriced relative to their earnings-growth potential. As a result, the industrials sector represents about 13% of the fund’s equity assets as of July 31, its largest overweight, up from 8% at the midpoint of 2022.
Valuations are generally depressed, says Kelley, given his expectation for improved structural demand that could fuel earnings growth. He also believes share prices of several stocks within the sector already reflect the possibility of a slowdown in U.S. economic growth.
The fund counts aerospace & defense contractors Boeing (BA) and Lockheed Martin (LMT) among its top holdings at the end of July. Kelley notes that for years, the U.S. has not produced enough commercial planes to meet demand, resulting in a healthy order backlog.
Meanwhile, the war in Ukraine has ramped up orders for military planes, says Kelley, noting that building large planes requires a multiyear lead time. Thus, he expects demand for planes to exceed supply, generating a steady order pipeline for Boeing and Lockheed Martin for the foreseeable future.
Kelley has favored Eaton (ETN), which makes a range of electrical and mechanical power-management products to help large manufacturing plants operate efficiently. If more plants are built on U.S. soil, Kelley thinks Eaton will see increased demand, especially given incentives for energy-efficient solutions embedded in the IRA.
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Daniel Kelley is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Kelley manages Fidelity Puritan Fund, Fidelity Advisor Diversified Stock Fund, and Fidelity Founders Fund.
Previously, Mr. Kelley managed Fidelity Trend Fund, Fidelity Large Cap Growth Fund, Fidelity Advisor Strategic Growth Fund, and Fidelity VIP Growth Stock Portfolio. He also managed Fidelity Select Construction and Housing Portfolio. Prior to assuming his portfolio management responsibilities, Mr. Kelley served as sector leader of the real estate investment trusts (REITs) research team, where he was responsible for the coverage of REITs and homebuilder stocks.
Before joining Fidelity in 2005, Mr. Kelley was an associate in the Institutional Equities division at Morgan Stanley. He was also a financial analyst, and later an associate, in the Equities division at Goldman Sachs & Co. He has been in the financial industry since 2001.
Mr. Kelley earned his bachelor of science degree, summa cum laude, in finance and accounting from Georgetown University.