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5 Stocks to Buy Despite Moderate Rise in Durable Orders

Nalak Das
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5 Stocks to Buy Despite Moderate Rise in Durable Orders

The rise in durable goods order indicates that the U.S. manufacturing sector is increasing capital spending driven by massive tax overhaul, deregulatory measures and strong demand.

On Oct 25, the Department of Commerce announced that the durable goods’ orders for the month of September inched up moderately after a massive gain in August. Notably, the increase marked the third gain in the past four months.

The rise in durable goods order indicates that the U.S. manufacturing sector, which constitutes around 12% of the country’s GDP, is increasing capital spending driven by massive tax overhaul, deregulatory measures and strong demand. Against this backdrop, it will be prudent to invest in stocks of those industries that performed well and have a favorable Zacks Rank.

Factory Orders Remain Strong Despite Slow Growth

U.S. durable orders for the month of September increased $2 billion or 0.8% to $262.1 billion. Shipments of manufactured durable goods increased $3.3 billion or 1.3% to $256.8 billion in September. This marks the fourth monthly increase in last five months. However, orders for core capital good fell 0.1%.

Demand for military aircraft advanced a whopping 119.1% while orders for commercial aircraft fell 17.5%. Meanwhile, transportation orders were up 1.9%. Orders for machinery increased 0.8% and demand for primary metals rose 0.1%. Meanwhile, demand for computer and communications equipment fell 0.4% and 0.1%, respectively.

Notably, on Oct 1, the Institute for Supply Management reported that the U.S. manufacturing index for the month of September was pegged at 59.8. New orders index for the month of September was pegged at 61.8, reflecting strong demand for U.S. manufacturing goods.  

Tax Cuts, Deregulation to Override Immediate Concerns

The U.S. manufacturing sector is currently plagued by three concerns. First, tariffs imposed on several industrial intermediary products have raised input costs. Moreover, ongoing trade related conflict between the United States and China is deteriorating with each passing day. As a result of trade conflicts, U.S. exports have become susceptible to retaliatory tariffs.

Second, the U.S. labor market is at its sturdiest since recession. Current unemployment rate of 3.7% is at its lowest since December 1969. Per latest government data, wages grew 2.9% in August on an annualized basis, reflecting its highest level since June 2009. Hike in wages will raise the cost of production.  

Third, the Fed has increased the benchmark interest rate for the third time in 2018 to 2.25%. The central bank has given indications of one more rate hike this year. A higher interest rate will raise the cost of funds for manufacturers.

However, tax-reforms and deregulation policies of the Trump administration are likely to act as major catalysts.  The corporate tax rate was lowered from 35% to 21%. President Trump has also promised to remove 75% of the regulations during his tenure. Trump’s business-friendly policies ought to help the private employers.

Our Top Picks

At present, the U.S. economy is firmly placed on growth trajectory. Strong manufacturing goods orders are normally associated with stronger economic activity. At this stage, investment in stocks likely to gain from the robust state of manufacturing will be a lucrative option. We narrowed down our search to five stocks with Zacks Rank #1 (Strong Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below depicts price performance of our five picks in the last three months.

AeroVironment Inc. AVAV designs, develops, produces, operates a portfolio of products and services for government agencies, businesses and consumers. The company has expected earnings growth of 25.9% for current year. The Zacks Consensus Estimate for the current year has improved by 22.5% over the last 60 days.

American Outdoor Brands Corp. AOBC is a manufacturer and seller of firearms and accessory products for shooting, hunting and outdoor enthusiast. The company has expected earnings growth of 45.7% for current year. The Zacks Consensus Estimate for the current year has improved by 26.4% over the last 60 days.

Curtiss-Wright Corp. CW provides high-tech, critical-function products, systems and services to the commercial, industrial, defense and power markets. The company has expected earnings growth of 22.5% for current year. The Zacks Consensus Estimate for the current year has improved by 0.2% over the last 60 days.

Trinity Industries Inc. TRN provides various products and services to the energy, chemical, agriculture, transportation, and construction sectors in the United States and internationally. The company has expected earnings growth of 7.9% for current year. The Zacks Consensus Estimate for the current year has improved by 3.8% over the last 60 days.

Altra Industrial Motion Corp. AIMC is a designer, producer and marketer of electro-mechanical power transmission products. The company has expected earnings growth of 25.9% for current year. The Zacks Consensus Estimate for the current year has improved by 1.6% over the last 60 days.

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Trinity Industries, Inc. (TRN) : Free Stock Analysis Report
 
Curtiss-Wright Corporation (CW) : Free Stock Analysis Report
 
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