Illinois Tool Works could be the best way to play an industrial boom

Industrials are getting a spark as the U.S. and China make progress in trade talks.

The XLI industrials ETF ended Friday 2% higher, less than 4% from recent highs. This could be the beginning of a bigger boom, says Piper Jaffray chief market technician Craig Johnson.

“We like the industrials,” Johnson told CNBC’s “Trading Nation” on Friday, noting the firm recently upgraded the sector to overweight from neutral. “When you look at the XLI, here’s an index that suggests that perhaps a close above about $80 would suggest a move back toward $100.”

A move to $100 on the XLI ETF implies 30% upside from current levels. That would also mark never-before-seen highs.

Industrials also soared on Friday after positive earnings from Fastenal. Johnson says those results has him bullish on a different industrials stock with high correlation to Fastenal – Illinois Tool Works.

“You’ve got kind of a nice bottoming setup happening here with a symmetrical triangle in the Illinois Tool Works and I could see a nice move out of that stock. We’d be a buyer of that and certainly the industrial sector,” said Johnson.

Illinois Tool Works is up 22% for the year, better than the 19% gain on the XLI ETF. Shares are still 14% below their January 2018 high.

Chad Morganlander, portfolio manager at Washington Crossing Advisors, agrees with Johnson’s bullish take on the industrials sector and adds another reason to buy in – valuations.

“Our portfolio we have roughly about a 23% weighting in industrials,” Morganlander said during the same segment. “There is actual deep value disparity so we will be buyers of industrials. You’re looking at companies that even with a global slowdown, the valuation really does make sense.”

The XLI ETF, which holds Boeing and Caterpillar among its top components, trades at 15 times forward earnings. By comparison, the broad-based S&P 500 trades with a 17 times multiple.

“Look for companies that don’t have a lot of debt on their balance sheet. That’s the one thing that I would caution. Look at companies that are consistently growing, consistently profitable with well diversified product lines and well-diversified client bases,” said Morganlander.

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