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Argus Research Raises
Rating on Industrial Sector

The Argus Strategy team recently raised its rating on the Industrial sector to Over-Weight from Market-Weight. The sector has demonstrated momentum in 2019, after a challenging year in 2018 (when financial headlines focused on tariffs and trade). The Fed’s rate-hike campaign last year also lifted the dollar, imposing another headwind on a group that relies heavily on international sales.

Underlying fundamentals have remained strong, and any top-line growth this year can be leveraged against expense structures that had been cut back sharply after the earnings recession of 2015-2016. As well, no sector outside Technology is embracing the digital economy as fully and quickly as Industrial, where sensors, connectivity, and AI-based automation are transforming the modern factory. The sector accounts for about 10% of the S&P 500 market capitalization. We think investors should look to allocate up to 12%-13% of their diversified portfolios to the group, says John Eade, President and Director of Portfolio Strategies with Argus Research, www.argusresearch.com, a leading independent Wall Street research firm. Here are five of their top Industrial sector ideas; all are rated BUY at Argus Research.

Illinois Tool Works (NYSE: ITW): The ITW shares are featured in our Portfolio Selector Focus List. This blue-chip diversified Industrial company appears on track to deliver low single-digit sales growth over the long term, which, along with margin expansion and a share-buyback program, has the potential to drive low double-digit EPS growth over the course of the economic cycle. Management also recently boosted the dividend by 28%, a sign of confidence in the company's prospects. The shares are 19% below all-time highs and offer value, in our view.

Northrop Grumman (NYSE: NOC): The NOC shares are also featured in our Portfolio Selector Focus List. Northrop is a global defense contractor with a focus on aerospace and, increasingly, electronic programs (including cybersecurity). The company's balance sheet is clean, and management has a history of meeting and beating analyst expectations. The shares are susceptible to headlines about cuts in defense spending and budget ceilings, as well as tweets and threats about trade and tariffs. However, we believe that recent defense-spending developments bode well for the industry for at least the next two years, and management has a history of navigating volatile political environments.

Deere (NYSE: DE): We recently raised our target price on the DE shares to $175. As a global manufacturing company, Deere is impacted by trends in trade policies, exchange rates and commodity prices. However, Deere management understands, and does a good job of managing, the factors it can control (such as pricing and costs). Current results are on an upswing, driven by a rebound in global demand, an accretive acquisition, and management's focus on costs. The shares are a core holding in our Equity Income model portfolio.

Johnson Controls (NYSE: JCI): This is a recent upgrade and is on our Portfolio Selector Focus List. Johnson Controls is emerging from a transformative period during which it has taken steps to become a top-quartile multi-industrial company with core growth platforms in buildings and energy storage. We expect the transformation to lead to more-consistent sales growth and margin improvement. In recent quarters, sales growth had been a problem, and management had repeatedly lowered Street expectations. However, a new CEO is investing in the sales team, and we expect to see stronger growth in a few quarters. On a technical basis, the shares could be in the early stages of a bullish pattern of higher highs and higher lows.

Roper Technologies (NYSE: ROP): This is a smaller, faster-growing Industrial company. Roper designs and develops software and engineered products for a range of end markets, including healthcare, transportation, food, water and energy. This well-managed company has a long record of market outperformance and dividend growth. We think the company is positioned well at this stage of the economic cycle, given its focus on productivity enhancement. The ROP shares are included in our Innovative Growth model portfolio and Separately Managed Account.

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