8 Industrial Stocks With Big Upside Potential

Only three sectors are seen posting second-quarter EPS year-over-year growth, said S&P, with industrials leading the way followed by information technology at 4.8%, and consumer staples at 1.3%.

On the flip side, materials companies' EPS are seen falling the most at 13.5% compared with last year in the quarter, followed by energy companies at a decline of 12% and telecommunications by 8.2%, S&P said.

But the share performance of the industrials sector is so far lagging the pack, up an average 4.4% this year versus the S&P 500's 7.7% gain.

S&P Capital IQ recommends a "market weight" position, "believing the sector's favorable fundamentals will be restrained by weakening global economic trends and industrial commodity prices as well as bearish technical readings."

Given that outlook, and the sector's diversity, any ebullience on industrials is not sector-wide, which means stock picking is in order.

But one example of the outperformance seen by select sector members is that of the bellwether Caterpillar(CAT) , the world's largest maker of construction and mining equipment.

On Wednesday, it reported second-quarter profit jumped 67% to a quarterly record, because of growing demand for its construction and mining equipment from the U.S. and Asia. It also boosted its 2012 earnings outlook by 10 cents, to $9.60 per share. That helped its shares pop 1.4% on the day.

Here then are the eight industrials sector stocks rated "strong buy" by S&P, presented in inverse order of their potential share-price upside versus S&P's price target:

8. A.O. Smith(AOS)

Company profile: A.O. Smith, with a market value of $2 billion, is a manufacturer of water heating equipment and electric motors for the residential, commercial and industrial markets.

Dividend Yield: 1.5%

Investor takeaway: Its shares are up 26% this year and have a three-year, average annual return of 25%. Analysts give its shares four "buy" ratings, two "buy/holds," and seven "holds," according to a survey of analysts by S&P. S&P has a $60 price target on its shares, which is an 18% premium to the current price.

7. Flowserve(FLS)

Company profile: Flowserve, with a market value of $6 billion, is a manufacturer of industrial pumps and related equipment for the chemical, oil and gas and power industries.

Dividend Yield:1.28%