20 BARRON’S October 12, 2020
INDUSTRY’S
An overhead system, powered
by Rockwell motors and thrusters,
places material on conveyors at
Rockwell Automation in Milwaukee
October 12, 2020 BARRON’S 21
NEW DAY
Technological
improvements
have largely
benefited tech stocks
duringthepast10years.
Why they’ll boost
industrial stocks next.
By Al Root
Photograph by Lyndon French
V
isit a mine these days and there’s a good chance
you’ll find Caterpillar ’s 797F. The truck stands
25 feet high, weighs nearly 290 tons, and comes
with a feature that would make Tesla co-
founder Elon Musk proud: It can operate itself.
Watching Caterpillar’s enormous trucks,
without drivers, as they slowly navigate open-
pit mines resembles an alien landscape from science fiction.
The future, however, is now, and it’s a profitable one.
Caterpillar can bill up to $5 million for one of these auto-
mated trucks and can charge more for software and data
collection from the vehicles.
Technology is no longer just about tech stocks—and in-
dustrial companies stand to benefit. Caterpillar (ticker:
CAT) and Rockwell Automation (ROK) are among the
companies harnessing the powers of data and automation
in ways that should make their sales more consistent and
their bottom lines more profitable in the years to come.
At the same time, a shift toward renewable energy and
electric vehicles provides the catalyst for companies with
electrification technologies, like Quanta Services (PWR)
and Eaton (ETN). In some cases, renewable energy will
replace the business that industrials have lost with the de-
cline of fossil fuels. Combined, these trends suggest that
after 10 years of limping along, it’s time for the industrial
sector to outperform.
“This should be the decade when the software boom
starts to accrue to the consumers of the technology from
the producers of the technology,” says Ironsides Macro
strategist Barry Knapp.
For the past 10 years, the industrial sector hasn’t been
the place to be if an investor wanted to outperform the mar-
ket. The S&P 500 Industrial Sector index rose just 12%
during the past 10 years, lagging behind the S&P 500 in-
dex’s 14% return over the same period, hurt by the collapse
of oil and coal, slowing growth in China, and the decline of
once-mighty General Electric (GE). Tech returned 20%
over the past 10 years, thanks to the dominance of Apple
(AAPL), the rejuvenation of once-tired titans like Micro-
soft (MSFT), and the arrival of new players like Zoom
Video Communications (ZM).
Yet historically, markets have moved in cycles, with
tech outperforming for a decade before giving way to in-
dustrials, and then reversing again. The tech-rich Nasdaq
Composite index returned less than 12% a year on average
during the 1980s, while the S&P 500, our proxy for in-
dustrials, managed average annual gains of 18%, spurred
by a commercial-construction boom.
The 1990s followed with the dot-com boom. In that de-
cade, tech gained 30% annually, while industrial stocks
managed 16% average annual gains. Tech lost 7% a year on
average in the 2000s, while industrial investors gained
about 1% a year, as China joined the World Trade Organiza-
tion and sparked a spike in infrastructure spending that
helped boost industrial company sales. Then, tech returned
to the ascendancy. Compared with the 20% average annual
gain for tech stocks over the past decade, industrial stocks
have returned less than 12%.
Now, there are signs that the cycle is about to turn again.
Tech stocks trade at 31 times 12-month forward earnings
estimates, their highest since the dot-com era. Industrials, on
the other hand, trade at 24 times earnings. That seven-point
gap is the largest since the early 2000s and a sign that tech
could be peaking.
“The future is uncertain, but it is probably a worthwhile