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This Month's Featured Story
Illinois Tool Works Faces Headwinds—2 Alternatives Stand OutAuthored by Nathan Reiff. Posted: 10/19/2026. 
Key Points
- JPMorgan cut its Illinois Tool Works price target by $80 due to sector-wide short-cycle demand concerns rather than company-specific weakness.
- Watts Water Technologies benefits from steady, recurring data center liquid cooling demand, posting record quarterly sales and outperforming ITW's stock this year.
- The Vanguard Industrials ETF offers a low-cost, diversified way to gain industrials sector exposure while mitigating risks tied to short-cycle companies like ITW.
- Special Report: Own these 5 stocks before the Nov 3 midterm election
Industrial component manufacturer Illinois Tool Works (NYSE: ITW) has faced a difficult October, with analysts at multiple firms lowering price targets or downgrading ratings. However, the reasoning behind the massive $80 price-target reduction from analysts at JPMorgan Chase (NYSE: JPM) had less to do with the overall strength of the business and more to do with its position within the broader sector—and the health of industrial stocks heading into the end of the year. Though industrials stocks have generally performed well as a group this year, short-cycle businesses—those in which customers place and receive orders within a span of just days or weeks—may be experiencing decelerating demand. This could be the result of a piecemeal manufacturing recovery in which new orders have rebounded faster than production backlogs have cleared. While this could be bad news for ITW, some companies in the sector may still be in a favorable position. ITW: Still a Strong Business Overall, But Demand Fluctuations Make Now the Wrong Time
The divergence between new-order growth and backlog clearance has often led to a period of deceleration in the past. For Illinois Tool Works, the problem is exacerbated by the company's international exposure, as more than half of its revenue is generated outside the U.S. Short-cycle headwinds are likely to affect many European and Asian manufacturers as a result of the fiscal crisis in France, a contraction in Germany's industrial sector, and a spotty recovery in China, among other factors. That said, ITW still trades at a premium valuation of almost 25 times earnings, and the company posted numerous strengths in its last quarterly report, including strong free-cash-flow conversion and the continuation of its long history of dividend increases. Investors may not want to disregard ITW completely, but they may want to consider other options that do not require a heavy premium and are less exposed to risks associated with the current trajectory of customer demand. Shares of ITW have climbed by about 10% year to date (YTD). Watts' Services and Products Have Unique Staying Power in the Data Center Infrastructure BuildoutLooking elsewhere in the industrials sector, Watts Water Technologies (NYSE: WTS) stands out as a flow-control and process-automation firm in an industry that is rapidly shifting and consolidating. WTS's growth is being boosted by its data center liquid-cooling business, a vital but often overlooked component of AI infrastructure. The essential element of WTS's appeal in this space—even amid concerns that new data center construction may be slowing—is that its cooling services are vital throughout a data center's life, not only during construction. Water management is a continual need for the AI industry and may generate steady demand for Watts' products in a way that short-cycle-dependent firms such as ITW do not experience. Watts is heading into the final months of the year with strong momentum, supported by record sales of $763 million in the last reported quarter, expanded full-year guidance, exceptional free-cash-flow conversion, and other positive metrics. Analysts are divided between Buy and Hold ratings but see modest upside potential based on a consensus price target of $367.70. WTS stock has significantly outperformed ITW, rising by roughly 28% YTD. VIS: Broad Exposure to the Industrials Sector to Mitigate Short-Cycle RiskInvestors looking to reduce or avoid a direct investment in ITW while still building exposure to the broader industrials sector may find that the broad Vanguard Industrials ETF (NYSEARCA: VIS) offers a cost-efficient way to access long-cycle names. At the same time, it provides baseline exposure to short-cycle companies that could benefit as broad strength in the manufacturing space picks up. With an expense ratio of 0.10%, VIS is a low-cost exchange-traded fund (ETF) with a robust asset base that helps ensure ample liquidity for more active investors. VIS also provides exposure to some of the sector's most stable and promising areas, including companies benefiting from recurring business associated with data centers, such as Watts. VIS is not the only option when it comes to broad industrial-sector funds, however, and other low-cost alternatives have similar portfolios. These funds are not necessarily identical, particularly given the unevenness across the industrials space. Investors may therefore want to review portfolio information to assess exactly how sector-wide funds are allocating their assets. . |
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