The U.S.-China trade turbulence and waning global demand seems to have taken its toll on the U.S manufacturing sector. Per the Institute for Supply Management’s latest report, the U.S Purchasing Managers’ Index (PMI) declined to 47.8% in September 2019 — the worst reading in a decade. Notably, the index had registered 46.3% in June 2009 — the last month of the Great Recession.
The PMI reading had shown signs of deceleration since April this year. Nevertheless, the reading had remained above 50, which denotes expansion. However, it declined to 49.1% in August – marking an end to the 35 consecutive months of expansion.
Of the 18 manufacturing industries, only three reported growth in September. New Orders Index registered 47.3% in September, compared with 47.2% in August. Production Index came in at 47.3% in September, decelerating from the 49.5% registered in August. Employment Index registered 46.3% in September, down from 47.4% in August. Notably, the new orders index, production index and employment index showed contraction in August after continued expansion of 43, 35 and 34 months, respectively.
Notwithstanding the dip, the PMI has averaged 53.5% over the last 12 months ranging from a low of 47.8% to a high of 58.8%.
The Industrial Products sector has underperformed the S&P 500 market owing to concerns regarding the impact of tariffs. Given that steel is a primary raw material, every company involved in manufacturing bore the brunt of rising steel prices owing to tariffs. In the past year, the sector has gained 7.0% while the S&P 500 has gone up 13.8%.
Will the Sector Rebound?
Any positive development on the United States-China trade war front will aid the sector’s recovery. Further, continued improvement in residential and non-residential construction and revival in infrastructure demand bode well for the industry. Mining companies are also resuming capital spending backed by improvement in commodity prices.
Moreover, the manufacturing companies continue to combat cost inflation to sustain their margins through pricing actions and cost control, increasing productivity and eliminating waste.
Promising Stocks Set to Bet on
We have zeroed in on four industrial stocks which have a Zacks Rank #1 (Strong Buy) or Rank #2 (Buy) and a VGM Score of A. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Our research shows that stocks with an impressive VGM Score of A or B when combined with a Zacks Rank 1 or 2, offer the best upside potential. Further, these companies have healthy earnings growth expectations.
You can see the complete list of today’s Zacks #1 Rank stocks here.
AGCO Corporation AGCO: This Duluth, GA-based company currently sports a Zacks Rank #1 and a VGM Score of A. The company has an estimated long-term earnings growth rate of 13.86%. The Zacks Consensus Estimate for earnings for fiscal 2019 reflects year-over-year growth of 30.59%. The Zacks Consensus Estimate has moved up 3% over the past 90 days. The company has an average positive earnings surprise of 33.84% in the trailing four quarters.
Brady Corporation BRC: The Zacks Consensus Estimate for earnings for this Milwaukee, WI-based company for this fiscal reflects year-over-year growth of 4.47%. The Zacks Consensus Estimate has moved north by 2% over the past 90 days. The company has an average positive earnings surprise of 9.68% in the trailing four quarters. The company has an estimated long-term earnings growth rate of 7.50%. The company sports a Zacks Rank #2 and a VGM Score of B.
Chart Industries, Inc. GTLS: This Ball Ground, GA-based company has an average positive earnings surprise of 13.87% in the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2019 reflects year-over-year growth of 49.50%. The Zacks Consensus Estimate for fiscal 2019 has moved up 1% over the past 90 days. The company has a Zacks Rank #2 and a VGM Score of A.
Sealed Air Corporation SEE: This Charlotte, NC-based company has a Zacks Rank #2 and a VGM Score of A. The company has an average positive earnings surprise of 10.53% in the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2019 indicates year-over-year growth of 11.20%. The Zacks Consensus Estimate for fiscal 2019 has gone up 2% over the past 90 days. The company has a long term estimated earnings growth rate of 10.18%.
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