Can Industrials Keep the Dow Rally Going?

After lagging for years, manufacturing is starting to gain momentum in surprising places.

Wall St. street sign with tall buildings in the background
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[Read: Is It Too Late to Buy Stocks?]

The companies he invests in are using high-tech enhancements, as carmakers have done, but operating in smaller markets where they are dominant and shielded from competition. Their technology investments of the past decade have created barriers for others to enter, so they are poised to grow strongly as the economy expands.

Reicher's Snyder fund also looks for companies that are generating cash flow as the best indicator of value. They are spread across sectors like transportation, energy, environmental services, food processing, and mining.

Some of his favorites are Clean Harbors, a hazardous-waste incineration company that is among the relatively few U.S. companies operating such facilities; Covanta, which produces energy from waste materials; Entegris, which outsources manufacturing from semiconductor makers; and Ingredion, a technology company that processes corn for sugar and other uses. The Snyder fund is a long-only fund for high net-worth and institutional investors, and Reicher says he has the luxury of finding cash-rich companies with long-term growth potential.

[See Emerging Markets to Consider in 2013.]

Fox's FAM Value Fund is also focused on value and cash flow. About a quarter of the fund's investments are in industrials. Fox cites Joy Global, a maker of mining equipment, as the kind of U.S. company "that sells to the world" and will fare well as the global economy recovers. Illinois Tool Works is another heartland company that holds value as a global seller of high-tech tools. Its erratic recent performance has made its shares relatively inexpensive.

"These companies tend to languish at low prices until somebody notices—that's what value investing is about," says Fox.

The fund managers say industrials with strong cash generation are being overlooked in favor of growth companies that have higher risk and less cash flow. "The market is so short-term oriented it is dominated by high-frequency trading and hedge funds and people using quantitative trading," says Reicher. "But it's not very good at finding long-term value, and that leaves room for people to make money by investing in good fundamentals of cash flow and earnings."