Industrials may be a silver lining in a cloud of economic uncertainty

Fidelity's Sammy Simnegar thinks industrial firms with secular-growth drivers offer compelling investment opportunity, even if the economy heads into recession.

• Fidelity Portfolio Manager Sammy Simnegar sees several trends driving growth in the industrials sector, especially recent federal legislation intended to boost spending on infrastructure, domestic semiconductor production and clean energy.
• "There are several compelling reasons to invest in industrial companies right now," says Simnegar, who manages Fidelity^® Magellan^® Fund. "With the U.S. economy sending mixed signals, appearing healthy by some measures but wobbly by others, I am attracted to firms in the sector with long-term growth drivers that could prevail even in the event of a recession."
• Simnegar's investment approach has been highly flexible since taking over the diversified domestic equity strategy in 2019, giving him the ability to choose both domestic and foreign issuers across all market capitalizations and styles. He favors high-quality growth stocks benefiting from long-term megatrends, as well as what he refers to as the three "B's"—brands, barriers to entry and "best-in-class" management teams.
• Based on this checklist, Simnegar has built a large position in GE Aerospace, the former jet-engine business of General Electric that became a standalone company in early April. He notes that the aerospace industry is still plagued by supply-chain tie-ups and a shortage of skilled labor, resulting in manufacturers of commercial aircraft struggling to consistently meet production targets.
• Because of these headwinds, he explains, airlines are forced to keep older planes in service for longer, creating considerable demand for replacement parts.
• Following the recent spin-off of GE's Vernova energy technology subsidiary, Simnegar notes that the newly streamlined GE is solely focused on manufacturing both original and replacement jet engine parts, providing what he considers a solid runway for growth.
• Elsewhere within the sector, he cites capital goods firm Watsco—a leading distributor of air conditioning, heating and refrigeration equipment—as another holding that fits the bill. The company is a play on the ongoing transition to clean energy, a trend that Simnegar believes has many more years to run.
• Moreover, he notes that Watsco is a founder-run business with a strong competitive position in its core markets, an excellent long-term track record of growing free cash flow per share through organic growth and acquisitions, significant revenue exposure to North America and a reasonable valuation, in his view.
• "Watsco's management team subscribes to a decentralized operating model that empowers individual business units and local managers to make decisions, which I see as a meaningful competitive advantage," Simnegar concludes.

Securities mentioned were fund holdings as of July 31.