Sector Screener: stock could be poised for more index outperformance

While the UK stock market has soared to a record high in recent months, some sectors have delivered an extremely poor performance.

For example, the FTSE 350 General Industrials sector has declined by 9% over the past year. This is 19 percentage points behind the return of the wider FTSE 350 index over the same period, with the sector’s underperformance having the potential to persist over the short run due to its inherent cyclicality.

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Short-term challenges

Indeed, the near-term outlook for the world economy remains uncertain. An era of increasing protectionism is likely to have a detrimental impact on global growth, with its full effects unlikely to have yet been felt owing, in part, to recent, as well as ongoing, pauses on previously announced tariffs.

Furthermore, inflation in developed economies such as the US and the UK remains considerably above central bank targets. Although it’s forecast to fall in both countries, this is likely to be a gradual process that takes many months to achieve.

For example, the Federal Reserve forecasts that the personal consumption expenditures price index, which is its preferred inflation measure, will fail to meet its 2% target over the next two years. The index is set to average 2.4% next year and 2.1% during 2027. The Bank of England, meanwhile, expects inflation to only fall to 2% on a consistent basis during 2027.

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Sticky inflation may mean that interest rates remain higher for longer. When combined with the existence of time lags following any further monetary policy easing, this could negatively affect the short-term prospects for cyclical firms such as those in the General Industrials sector.

Long-term growth potential

While the world economy’s short-term prospects are uncertain, its long-term outlook is more upbeat than many investors may currently realise. Although inflation is expected to remain sticky over the medium term according to central bank forecasts, its temporary above-target status and gradual prospective decline over the coming months may present an opportunity to implement a looser monetary policy.

Indeed, the Bank of England reduced interest rates by 25 basis points to 4% earlier this month despite inflation still being 160 basis points above its 2% target.

When coupled with the effects of previous interest rate cuts that have not yet been fully felt due to the existence of time lags, further monetary policy easing could lead to a more ebullient economic outlook. This may prompt improved operating conditions for firms in the General Industrials sector that are highly dependent on the rate of global GDP growth.

In turn, this could mean higher profits for sector incumbents that equate to rising share prices and improved performance from the sector vis-à-vis the wider stock market.

Source ShareScope. Data at 19 August 2025. Past performance is not a guide to future performance.

Source ShareScope. Data at 19 August 2025. Past performance is not a guide to future performance.

Value for money

In the meantime, stocks in the General Industrials sector could offer good value for money on a long-term view. Weak investor sentiment towards its incumbents, as evidenced by the sector’s substantial underperformance of the wider stock market over the past year, means that their earnings multiples may currently be at levels that provide scope for substantial upward reratings.

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Even stocks that have outperformed the wider sector, or in some cases the FTSE 350 index, over recent months could still trade below their intrinsic value as a result of their upbeat long-term prospects.

Of course, their share prices could prove to be relatively volatile in the short term as an uncertain economic period persists. However, sector incumbents that have modest debt levels and a solid competitive position are relatively likely to overcome potential near-term economic challenges to ultimately deliver an improving financial performance.

Therefore, long-term investors who are willing to adopt a contrarian view could unearth high-quality, attractively priced stocks in the General Industrials sector that deliver much-improved performance in the coming years.

Index outperformance

For example, General Industrials sector incumbent Smiths Group (LSE:SMIN) appears to offer a favourable risk/reward opportunity.

The engineering firm has bucked the wider sector trend over the past year, with its share price rising by 33% since it was first discussed in this column during August last year. This represents a 42 percentage point outperformance of the wider sector and is 23 percentage points ahead of the FTSE 350 index’s rise over the past 12 months.

Sound financial performance

Encouragingly, the company’s latest quarterly trading update showed that its financial performance has been relatively strong. For example, organic revenue growth (which does not include the impact of acquisitions) was 10.6% in the third quarter of the 2025 financial year as it experienced an improving performance across all of its various business segments.

This led the firm to increase its financial guidance for the full year. It now expects organic revenue growth to be towards the top end of its previously announced range of 6%-8%. Its operating profit margin, meanwhile, is still anticipated to increase by 40-60 basis points so that it reaches 17.2%-17.4% in the 2025 financial year.

Source ShareScope. Data as at 15 August 2025. Past performance is not a guide to future performance.

Company reorganisation

The company’s trading statement confirmed that it is pressing ahead with plans to separate parts of its business in the coming months. This reorganisation could allow the firm to focus on faster-growing segments that are better placed to deliver rising profits over the long run, thereby potentially catalysing its financial performance.

An ongoing share buyback programme could have a further positive impact on the firm’s share price. Its trading update stated that it has spent just over half of the £500 million that has been earmarked for share repurchases in the 2025 calendar year.

Sound fundamentals

Smiths Group’s financial performance, and share price, could also be boosted by further acquisitions. It spent £97 million on purchasing other companies in the first half of the latest financial year, with its balance sheet strength indicating that it can afford to make further acquisitions in future.

Its net debt-to-equity ratio, for example, is just 12%, while net finance costs were covered 20.7 times by operating profits in the first half of the 2025 financial year. Both figures suggest the company could increase its debt levels without harming its solid financial position. Moreover, they indicate that the firm is in a strong position to overcome an uncertain near-term economic outlook.

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Indeed, the company appears to be relatively well placed to ride out the current era of increased protectionism. Although 45% of its sales are to customers in the US, most are domestically produced. Therefore, the business may be less impacted by higher US tariffs than some of its sector peers, although a global economy that slows as a result of rising import duties could still cause elevated share price volatility in the short run.

A high valuation

Following its aforementioned share price rise over the past year, Smiths Group now trades on a price-to-earnings ratio of 22. This is significantly higher than the earnings multiple of 17 when it was first discussed in this column during August last year. However, the company’s strong financial performance and upbeat prospects suggest it could be worthy of a relatively rich market valuation.

The company, moreover, has a sound financial and improving competitive position that should help it to overcome near-term economic uncertainty and benefit from subsequent improvements in the rate of global GDP growth. And with a sound strategy that could lead to a greater focus on faster-growing parts of the business, it would be unsurprising if the stock generated further sector and stock market outperformance over the coming years.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.