With the S&P Industrial sector down 38.5% for 2008, investors have for the most part steered clear of this manufacturing-driven area of the market. With housing companies relying on things like transportation, volume, government spending and fresh construction projects, it’s hard to imagine that there is high confidence in the the air.

Many made the mistake of overweighting industrial companies on a valuation basis in the fall of 2008, and major losses were incurred as a result. Now, in the new year, is the global picture really as bad as it has been made out to be? I believe the answer is “probably not,” and encourage you to consider industrial companies in 2009.

What strengths are present in industrial companies for the coming year? As we continue to receive downcast readings from economic indicators like the ISM Manufacturing Index, Construction Spending reports and Durable Goods orders, it becomes difficult to trust much of anything. However, as international governments begin to accelerate programs encouraging projects in infrastructure spending and energy efficiency… the direct beneficiary are industrial companies.

When investors stick to companies with strong cash flows and resilient order backlogs, I believe that there are major profits to be made from historically low P/E ranges across nearly every industry within the sector. Accounting for additional federal stimulus and re-initiated spending plans, we believe that several major investment themes will exist in the industrial arena; for 2009, we see strength in defense, engineering and construction, logistics and energy efficiency.

Now that we have had a chance to outline expectations for the sector as a whole, I would like to narrow the field to three “superstars” that Bullish Bankers believes will outperform the benchmark, while maintaining a relatively low degree of risk:

Northrop Grumman (NOC: 45.49, 0.00 (0.00%))

One of my favorite investment themes for 2009 is in the defense sphere. As opposed to aerospace, which is still largely cyclical and volatile, the defense thesis follows a global arms race that is without a doubt taking place. One thing to remember is that as the global economy worsens, we typically see more geopolitical tensions arise.

Sure, it may not be the most “socially responsible” play in the book, but when we see events like Russia supplying Iran with surface-to-air missiles, increasing tensions in the Gaza strip and China & North Korea moving into contracts with Cuba and Venezuela to control Latin America… one has to start thinking defensively.