This fund manager picked four industrial winners a year ago. Here are his latest picks.

The industrial sector has demonstrated strong performance, with a 23.5% total return over the past year, largely fueled by increased aerospace and defense spending, and is projected for robust revenue (6.6% CAGR) and EPS (14.9% CAGR) growth through 2027. Despite current elevated valuations (forward P/E 126% of 10-year average), significant catalysts, including geopolitical-driven defense spending, potential Trump administration policies favoring domestic industrial demand, AI-driven data center infrastructure needs, and new tax incentives for capital expenditure, are poised to drive continued sector growth. Building on past success (Bill Hench's prior industrial picks returned 71%), fund managers are now highlighting new small-cap industrial opportunities such as Commercial Metals Co., Wesco International Inc., Thermon Group Holdings Inc., and Advanced Energy Industries Inc., citing their undervaluation and exposure to these secular tailwinds.

Analysis

The industrial sector has delivered a 23.5% total return over the past year, outperforming the S&P 500's 13.1% return, driven significantly by a robust aerospace and defense industry. Despite a high forward P/E ratio that is 126% of its 10-year average, the sector's outlook is supported by powerful secular tailwinds. Analysts project a 6.6% compound annual revenue growth rate and a 14.9% EPS CAGR through 2027. Key catalysts include geopolitical conflicts fueling defense spending, potential fiscal policies promoting domestic capital expenditures, and new tax rules allowing for accelerated depreciation and immediate R&D expensing which incentivize investment starting in 2026. Furthermore, the expansion of AI is creating sustained demand for data center infrastructure, benefiting capital goods suppliers. This environment creates opportunities in specific sub-sectors, as demonstrated by fund manager Bill Hench's four new small-cap picks: Commercial Metals (CMC), Wesco International (WCC), Thermon Group (THR), and Advanced Energy Industries (AEIS). These companies are positioned to capitalize on trends like data center construction and industrial electrification while trading at relatively low forward P/E ratios of 12.1 and 13.6 for CMC and WCC, respectively, and showing strong projected EPS growth.

Key Decisions for Investors

• Given the industrial sector's elevated valuation, investors should be selective, focusing on small-cap companies with direct exposure to secular growth drivers like data center construction, industrial electrification, and defense spending.
• Consider initiating or increasing positions in undervalued industrial names like Commercial Metals (CMC) and Wesco International (WCC), which trade at low forward P/E multiples despite strong EPS growth forecasts tied to these themes.
• Monitor key upcoming catalysts that could further propel the sector, including the specifics of new fiscal policies, the pace of data center capital expenditures, and evolving geopolitical tensions that impact defense budgets.
• Given the performance dispersion among past stock picks, where two soared and two lagged, it is prudent to diversify across several industrial names rather than concentrating a position in a single company.