The market rally has spread to our 4 industrial stocks. Here's what we're doing next

Published Thu, Jun 15 202310:10 AM EDTUpdated Thu, Jun 15 202310:28 AM EDT

The recent tech-fueled rally on Wall Street is broadening and benefiting other areas of our diversified portfolio. Our four industrial-focused stocks — Caterpillar (CAT), Emerson Electric (EMR), Honeywell (HON) and Linde (LIN) — have all been gaining steam over the past three months. Jim Cramer provided a comprehensive update on each company during the Club's June Monthly Meeting on Wednesday. Before we go name by name, let's look at what's driving this newly confirmed bull market, which was minted last week when the S & P 500 closed more than 20% above its October 2022 low. Jim called the end of the bear markets months ago, but he's been recently encouraging investors to take some profits in an overbought market driven by artificial intelligence enthusiasm. He's also been preaching the virtues of a diversified portfolio, which took on added urgency after the Federal Reserve's June meeting. The market initially sold off sharply Wednesday afternoon following the Fed's so-called "hawkish pause" in its interest rate hiking cycle. Fed officials stressed it was a pause in tightening, not the end. In fact, the post-meeting policy statement indicated two more hikes were likely this year. Fed Chairman Jerome Powell, at his news conference, said he's still worried about inflation despite cooler recent data. At the close, the Dow Jones Industrial Average trimmed some of its losses and the S & P 500 and Nasdaq turned positive. "Tech isn't the only game in town," Jim said during the Club's Meeting before the Fed decision, adding that when tech eventually goes down, investors will want to be in the cyclicals or stocks tied more closely to the economy. "The thing that I am most proud of right now is that we've held on to the industrials. … Our move into the cyclicals is going to make us a lot because while tech is an unstoppable rally it will one day stop." The industrial sector is vital to economic growth. Companies in this sector are involved in the production of real-economy things such as construction machinery, devices for intelligent manufacturing, aerospace components, and industrial gases — to name a few of the areas our holdings are engaged in. There are positive short-term catalysts for our industrial holdings including the U.S. government's commitment to infrastructure spending, global decarbonization initiatives, and industrial automation. Here's an update on each of our industrial-centric holdings and Jim's latest thoughts on how to play each stock going forward. Caterpillar Caterpillar, the world's leading manufacturer of construction and mining equipment has seen its shares gain 16% over the last month. The company's CEO, Jim Umpleby participated in Bernstein's 39 th annual conference on Jun. 1, providing upbeat comments on the state of the business. The company reported a very strong first quarter in April and based on the strength of those results, Umpleby emphasized that full-year 2023 will be better than anticipated. CAT's business in China, which typically accounts for 5% to 10% of its business will be less this year as the country continues on a path of post-Covid economic recovery. Still, the company's overall performance in construction is expected to be strong. CAT YTD mountain Caterpillar's stock performance year-to-date. The Club's take: Caterpillar is a beneficiary of infrastructure and federal spending and is not as levered to China as much as what the market thinks. We are encouraged by Umpleby's remarks which suggest that demand for CAT equipment and services is robust. Despite the stock's recent run, Jim things shares of CAT can go higher. We're not planning on capturing gains yet because the stock is still too cheap, selling at 13.7 times earnings. Jim Wednesday called CAT "one of the most undervalued stocks in the portfolio," as federal funds from the government's Inflation Reduction Act have yet to be unleashed, which will eventually flow into the CAT's pipeline. The company has a strong track record of strong free cash flow, a sound balance sheet, and a history of growing its dividend. In fact, Caterpillar Wednesday announced an 8% increase to its dividend to $1.30 per share, sweetening our investment case. Emerson Electric We were not all that pleased when management at industrial giant Emerson Electric decided to acquire National Instruments (NATI), in an initial hostile bid and went above its initial price point on the deal. But now that Emerson is past the deal uncertainty, we are more focused on how the company will execute on the automation and software strategy outlined at least year's Investor Day. For all these reasons, Jim said EMR stock has been "stuck in the mud." We'd like to see management overcome these areas because the company is an industry leader with a strong technology solutions portfolio. EMR shares have popped roughly 5% over the past 30 days. On Thursday, HSBC upgraded Emerson to buy from hold and raises its price target on the stock to $100 per share from $79. The analysts call EMR a "completely transformed automation pure-play." EMR YTD mountain Emerson Electric's stock performance year-to-date. The Club's take: Management dropped the ball on the price paid for National Instruments but now it's time to shift focus back to fundamentals, which have been showing encouraging momentum. Jim believes that shares of EMR are on their way higher. Emerson delivered a solid fiscal second quarter in May while raising its full-year outlook. The company should also be a beneficiary from the clean carbon energy transition. It's also an important technology partner through its technology solution offerings and the company's investments in the chemical industry are also driving growth. This diversified business is one of the key factors that separates Emerson as a market leader and why we're holding on. EMR stock also pays a healthy 2.5% annual dividend yield and is a real dividend aristocrat. Jim said it's time to buy EMR. Honeywell Honeywell has stellar leadership. There is a new CEO, Vimal Kapur, a Honeywell veteran who has been with the company for 34 years. Honeywell's defense and aerospace division is very strong and is considered one of the market leaders. During the Wells Fargo 2023 Industrials Conference, Honeywell's CFO said Wednesday that he's starting to see China improve. While Honeywell's China business grew low-single-digits on a percentage basis in the first quarter, Lewis sees that accelerating in Q2. HON YTD mountain Honeywell's stock performance year-to-date. The Club's take: Jim expects Honeywell's stock to go higher from here as the market broadens beyond a handful of tech stocks. We're staying the course because Honeywell continues to build out its pipeline after starting the year with a strong backlog. "When the market expands beyond tech we are in the right spot with Honeywell," Jim said. If investors don't have any HON shares, Jim said it's time to buy some, calling it "one of the cheapest stocks in the portfolio." Linde Linde, the largest industrial gas company worldwide, hit an all-time Wednesday. Linde has a strong backlog that serves to support management's expectation for continued earnings growth. Even though its products and services are for industrial end-markets, Linde's business doesn't tend to be subject to seasonal fluctuations and therefore can be resilient in different economic climates. With LIN's strong 14% year-over-year gain, investors may be tempted to lock in some gains. Jim said there could be more upside ahead. LIN YTD mountain Linde's stock performance year-to-date. The Club's take: We're happy to see a rise in LIN shares but we are not ready to take profit since we think the stock is ready to breakout further. 'We're holding Linde for the long-term since there's continued global demand for its industrial gases, its pricing power, strong execution, and ongoing shareholder returns via dividends and buybacks. For an update on the rest of the stocks in the portfolio, check out our Monthly Meeting rapid-fire . (Jim Cramer's Charitable Trust is long CAT, HON, EMR, LIN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Caterpillar excavators are displayed for sale at the Whayne Supply Co. dealership in Louisville, Kentucky, Jan. 27, 2020.

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