Finding Inspiration on the Road – Investing in U.S. Industrials

May 28, 2024

A couple of Sundays ago, I was traveling through the Columbus, Ohio airport with my daughter on a quick college visit. While addressing some (slight) jitters about the next steps of her life, I noticed that Vertiv Holdings, a Columbus-based company we currently hold in client portfolios, had its name splashed all over the baggage claim area billboards.

Vertiv is not a household name like Apple or Costco (also in HCA client portfolios), probably because it is not consumer-facing. It specializes in infrastructure for data centers, communication networks, and commercial and industrial facilities. But, as visitors collect their bags and head to downtown Columbus, Vertiv’s marketing department would like the name to occupy some space in their minds for a few seconds. Which it did — at least in mine.

In fact, we hold a handful of lesser-known industrial companies across portfolios that are somewhat like Vertiv — think valves, switches, cooling gels, fabricated steel, or electrical systems. Although industrial end markets like thermal insulation solutions are not as in vogue as the Magnificent Seven technology darlings, we think industrial companies will be meaningful for portfolio performance going forward.

One reason is the recent price performance of this group of stocks. The Dow Jones U.S. Small Cap Industrials Index is up about 30% since year-end 2022 vs. a 12% increase in the Russell 2000 (the comparable small-cap index). Ironically, and perhaps as a contrarian indicator, this outperformance occurred during a period of collective Wall Street handwringing about the U.S. economy slowing down.

Source: Bloomberg

Furthermore, there is support for the asset class from three federal spending acts, each of which fosters construction that will involve products from firms such as Vertiv:

  1. The Infrastructure Investment and Jobs Act – In 2021, $1.2 trillion was approved for infrastructure, with $650 billion of that already in the pipeline for federal infrastructure projects.
  2. The CHIPS & Science Act – In 2022, the government granted $250 billion for research and development for American semiconductors. New chip plants are being built in the U.S., including one in Ohio.
  3. The Inflation Reduction Act – Also enacted in 2022, this act is about combating climate change and boosting our energy production, with $400 billion aimed at ramping up clean energy production and manufacturing through tax credits.

Beyond government spending, corporate and federal initiatives to protect American industry also support the case for investing. The pandemic prompted a national reassessment of supply chain vulnerabilities. As corporate boards weigh the importance of keeping suppliers close to home vs. finding cheaper solutions overseas, “onshoring’ or ‘reshoring” should help many U.S. industrial companies.  At the same time, both sides of the aisle in DC have embraced trade tariffs to protect U.S. industries from foreign competition (China) and level the playing field for certain goods being dumped in the U.S.

Finally, artificial intelligence-powered automation (yes, I had to bring AI into this) is enhancing productivity, cost structure, and competitiveness in U.S. manufacturing. And, as the demand for AI increases, this will continue to put stress on the nation’s electric grid and create demand for new data centers – one of the reasons that Vertiv’s share price is up over 100% this year.

Will the industrial names we invest in make most of us excited to see them on a billboard? I am guessing that might be a “hard no” (sorry, marketing departments). Nonetheless, we are investing more in this sector to capitalize on the ongoing trends that are reinvigorating the industrial U.S. – a part of the economy that has been overlooked and underrepresented in the daily investment conversation for a long time.