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Investment Ideas

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Although far from robust, the U.S. economy has been showing some signs of life lately. Fourth quarter GDP came in at 2.8% - its highest level in a year and a half. And the labor market finally has some positive momentum behind it with the economy adding 243,000 jobs in January, on top of 203,000 in December.

For 2012, economists predict U.S. GDP growth around +2.4%. That should be strong enough to drive decent corporate earnings growth this year. And with valuations on the S&P 500 around just 13x 2012 earnings, stocks look pretty attractive, especially next to the paltry returns of cash or bonds.

Still Recovering from the Selloff

The second half of 2011 was a rough one for stocks. The S&P began selling off in late July over fears of a recession in the U.S. And although that proved to just be a brief rough patch, stocks stayed depressed thanks to the Eurozone debt crisis.

But amid improving economic data and falling bond rates in Europe, the S&P has rallied 12% almost without interruption since December 19 and is just 2% below its 2011 highs. One of the groups that has rallied the most over that stretch is the cyclical Industrial sector.

Many of these stocks were also the ones that got beaten down the most during the pullback. And despite their recent surge, some are still trading well below their 52-week highs, even after fairly strong Q4 earnings.

If the U.S. economy can sustain its momentum and isn't derailed by the debt crisis in Europe or a hard landing in China, the industrial sector should see solid revenue growth and very strong EPS growth this year due to a relatively high degree of operating leverage.

4 Stocks to Consider

I've highlighted 4 small cap industrial stocks below that offer strong upside potential over the months ahead:

TriMas Corporation (TRS - Snapshot Report) is an industrial manufacturer and distributor of highly engineered products. It reports its operations in six segments: Packaging, Energy, Aerospace & Defense, Engineered Components, Cequent Asia Pacific and Cequent North America.

Investors fled this cyclical stock back when recession fears gripped the market, and the share price plunged 50% from early July through late September. But economic data began improving and TriMas continued to deliver strong earnings beats.

Shares have surged 45% since December 19 but are still 14% below their 52-week high. And valuation still looks attractive with shares trading at just 12.7x forward earnings.

Actuant Corporation (ATU - Analyst Report) manufactures and distributes a wide range of industrial products to various end markets. The company reports its operations in four segments: Industrial, Energy, Electrical and Engineered Solutions.

Shares of ATU sold off heavily in late July and early August as investors fled economically-sensitive industrial stocks. And although the stock has soared 36% since December 19, it is still 10% off its 52-week high.

Consensus estimates have been rising after the company delivered a strong earnings beat and management raised its 2012 guidance back on December 21. It is a Zacks #2 Rank (Buy) stock.

Shares are trading at just 13.2x forward earnings, below its 10-year median of 15.5x.

AM Castle (CAS - Snapshot Report) distributes specialty metals and plastics to industrial companies. In other words, it is an industrial company for industrial companies.

AM Castle was not immune to the selloff in the second half of 2011 either. And although the stock has rallied over the last month and a half, shares are still approximately 40% below their 52-week high. Part of the reason for this is because of higher than expected financing costs for an acquisition, but analysts believe that selloff was overblown.

Consensus estimates have been rising over the last several weeks, sending the stock to a Zacks #2 Rank (Buy). Shares look awfully attractive at just 7.5x 12-month forward earnings, well below its 10-year median of 12.2x.

Columbus McKinnon (CMCO - Snapshot Report) manufactures material handling products which efficiently move, lift, position and secure material. Some of its key products include hoists, actuators, cranes and lifting and rigging tools.

The company relies on a healthy economy, so when investors feared an economic slowdown last summer, shares plunged. The stock has rallied almost 30% since the company reported excellent quarterly results on January 13. But shares are still 25% off their 2011 highs.

The stock trades at just 12.5x forward earnings, so it looks like it has plenty of room to run higher.

Bottom Line

Continued improvement in the U.S. economy should drive strong earnings growth for these 4 small caps. And with shares still trading below their 52-week highs after last summer's selloff, they offer a lot of upside potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com and Co-Editor with Steve Reitmeister of the Reitmeister Value Investor that snaps up discounted value stocks and sells them after the market realizes their true worth for long-term gains.

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