Industrials businesses quietly power the physical things we depend on, from cars and homes to e-commerce infrastructure. But they are at the whim of volatile macroeconomic factors that influence capital spending (like interest rates), and the industry has underperformed the market over the past six months as its 1.3% return lagged the S&P 500 by 9.7 percentage points.
Only some companies are subject to these dynamics, however, and a handful of high-quality businesses can deliver earnings growth in any environment. With that said, here are two industrials stocks we think can generate sustainable market-beating returns and one we would avoid.
One Industrials Stock to Sell:
Northrop Grumman (NOC)
Market Cap: $80.65 billion
Responsible for the development of the first stealth bomber, Northrop Grumman (NYSE:NOC) specializes in providing aerospace, defense, and security solutions for various industry applications.
Why Are We Out on NOC?
- Organic sales performance over the past two years indicates the company may need to make strategic adjustments or rely on M&A to catalyze faster growth
- Anticipated sales growth of 5.9% for the next year implies demand will be shaky
- Earnings growth underperformed the sector average over the last five years as its EPS grew by just 2.4% annually
Northrop Grumman’s stock price of $566.59 implies a valuation ratio of 19.1x forward P/E. To fully understand why you should be careful with NOC, check out our full research report (it’s free).
Two Industrials Stocks to Watch:
Lennox (LII)
Market Cap: $15.06 billion
Based in Texas and founded over a century ago, Lennox (NYSE:LII) is a climate control solutions company offering heating, ventilation, air conditioning, and refrigeration (HVACR) goods.
Why Are We Positive on LII?
- Excellent operating margin of 17.7% highlights the efficiency of its business model, and its operating leverage amplified its profits over the last five years
- Free cash flow margin jumped by 8.6 percentage points over the last five years, giving the company more resources to pursue growth initiatives, repurchase shares, or pay dividends
- Market-beating returns on capital illustrate that management has a knack for investing in profitable ventures
Lennox is trading at $437.64 per share, or 17.9x forward P/E. Is now a good time to buy? Find out in our full research report, it’s free.
Keysight (KEYS)
Market Cap: $57.58 billion
Spun off from Hewlett-Packard in 2014, Keysight (NYSE:KEYS) offers electronic measurement products for use in various sectors.
Why Does KEYS Catch Our Eye?
- Superior product capabilities and pricing power lead to a best-in-class gross margin of 63.3%
- Impressive free cash flow profitability enables the company to fund new investments or reward investors with share buybacks/dividends, and its growing cash flow gives it even more resources to deploy
- Stellar returns on capital showcase management’s ability to surface highly profitable business ventures
At $336.22 per share, Keysight trades at 30.9x forward P/E. Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.
High-Quality Stocks for All Market Conditions
WHILE YOU’RE HERE: Top 9 Market-Beating Stocks. The best stocks don’t just beat the market once. They do it again. And again. Robust revenue growth, rising free cash flow, returns on capital that leave their competition in the dust. The market has already rewarded these businesses.
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Stocks that made our list in 2020 include now familiar names such as Nvidia (+1,460% between June 2020 and June 2025) as well as under-the-radar businesses like the once-micro-cap company Kadant (+214% between June 2020 and June 2025). Find your next big winner with StockStory today.