Caterpillar and two other industrial stocks are best in show this earnings season, market watchers say

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Would not buy industrials ahead of earnings, says investing pro

It's an industrial-size rush in earnings this week.

Nearly half of the industrials sector is reporting before the week is out including heavyweights Caterpillar, Honeywell and Boeing. 3M and United Technologies, which announced results Tuesday morning, were a mixed bag -- United Technologies topped estimates, while 3M fell short.

Quint Tatro, president of Joule Financial, is bullish on the sector but needs to see a pullback to add to any position.

"The industrials is definitely an area that we like," Tatro said Monday on CNBC's "Trading Nation." "Valuation wise, it's very attractive but I've got to tell you right now, we're on hold and I think we've got to see how these earnings reports play out. But if we get weakness in the sector after earnings, we do think it's a good opportunity to venture in."

The XLI industrials ETF trades at nearly 18 times forward earnings, though below the 18.5 times forward multiple for the S&P 500.

There is one top sector stock Tatro sees as a major buy on any post-earnings weakness.

"Our top conviction is Caterpillar – 13 times forward [earnings], 1.4 times sales, attractive valuations, 3% dividend. Again, I'm not so sure what will happen after earnings. We would not buy ahead of earnings but look to be a buyer of a dip after earnings," said Tatro.

Caterpillar is scheduled to report earnings on Friday. The company's shares have fallen 7% this month.

Ari Wald, head of technical analysis at Oppenheimer, said the trend is your friend when it comes to the industrials sector this reporting stretch.

"High momentum is just starting to reclaim its leadership versus low momentum for the market broadly, and I think that theme sticks for the industrial sector, too. On the high momentum side, Lockheed Martin and Dover -- both stocks are above both 2018 and 2019 resistance in established uptrends. Those are your leaders, buy those," Wald said during the same segment.

Lockheed Martin reported better-than-expected earnings and sales for the fourth quarter on Tuesday morning. The stock was up 1%. Dover is scheduled to report Thursday. Lockheed has added 17% over the past three months, while Dover is up 12%.

"In terms of where we see vulnerability, UPS and 3M. Both those stocks are making lower highs since 2018. The weak get weaker when the market conditions sour. You're at risk that those downtrends turn lower, if the market is going to turn lower," added Wald.

UPS is scheduled to report Thursday.

Disclosure: Tatro and Joule Financial hold Caterpillar.

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