The quest for electrifying gains in industrials

Surging growth within the industrials sector has been supercharged by the electrification of the U.S. economy and a boost from recently enacted legislation, says Fidelity's Forrest St. Clair.

• The backdrop for stocks in the industrials sector has considerably brightened the past couple of years, fueled by extraordinarily stimulative U.S. fiscal spending, resulting in what Fidelity Portfolio Manager Forrest St. Clair calls a "transformative force that is reshaping industries and creating new investment opportunities."
• "One trillion dollars has either entered or will be entering the economy via the Inflation Reduction Act and the CHIPS and Science Act, each enacted in August 2022," explains St. Clair, who helms Fidelity^® Small Cap Discovery Fund. "Although a lot of money has been spent, most of it is earmarked for future projects, making the outlook for certain industrial companies as positive as I can remember in some time, even after considering how far these stocks have already come."
• In managing the small-cap core strategy, St. Clair emphasizes better-than-average companies trading at a below-average price, with a goal of being "paid twice"—once on the companies' above-average earnings-per-share growth and a second time on expansion of their earnings multiple as the market realizes this growth.
• The electrification theme is not just a trend, he underscores, but a transformative force that is reshaping industries and creating new investment opportunities, many of which St. Clair is particularly excited about, bolstering the fund's outsized exposure to industrials stocks.
• As he sees it, firms involved in upgrading and expanding the electric grid, increasing electricity production and developing electric vehicles are poised to benefit from the economic stimulus.
• As an example, St. Clair cites IES Holdings, a designer and installer of electrical and technology systems that has strategically positioned itself to benefit from the electrification wave. By divesting underperforming businesses, he adds, the firm has bolstered its profit margin and capitalized on industrywide supply-and-demand imbalance amid a tight labor market.
• Elsewhere in the portfolio, St. Clair has favored AZZ, which provides anti-corrosion metal-finishing solutions. While St. Clair considers this a "sleepy" business, he appreciates its profitability and strong competitive position. Moreover, he expects that demand for its protective solutions will rise, driving the firm's growth.
• "I see a phenomenal backdrop for these and other businesses well-positioned to leverage the electrification theme," St. Clair concludes. "I remain vigilant, constantly on the lookout for prospective stocks that align with this long-term opportunity."

Securities mentioned were fund holdings as of July 31.