On Mar 13, the Department of Commerce released U.S. factory orders for long-lasting durable goods in January. Although the increase was a modest one in terms of percentage, what is more important is that the consensus estimate was for a contraction of factory orders.
Moreover, core durable goods order – a key metric to track business investment plan – jumped significantly. Against this backdrop, it will be prudent to invest in stocks with a favorable Zacks Rank that are poised to gain from the solid factory orders data.
Solid Durable Goods Data in January
The Department of Commerce reported that new orders for manufactured durable goods rose $0.9 billion or 0.4% to $255.3 billion in January from December. This was the third straight month of growth for durable goods orders. Notably, the consensus estimate for factory orders in January was for a decline of 0.4%.
More important information from the report is that the core durable goods order (which exclude defense aircraft) jumped 0.8% in January after witnessing a sharp fall in the previous two months. This also reflects highest monthly gain of core factory orders since July 2018. In January, leading performers were commercial aircraft, networking gear, transportation equipment and machinery segments.
Implication of Strong Core Durable Goods Data
Economists view the core durable goods order data as business investment plans by U.S. corporates. A significant rise in this metric indicates that the U.S. manufacturing sector, which constitutes around 12% of its GDP, is pushing up capital spending driven by a massive tax overhaul, deregulatory measures and a growing domestic economy.
Industry researchers were highly concerned about future capital spending by the U.S. manufacturing sector due to a stiff rise in interest rate in 2018 and concerns about an impending global economic slowdown. However, core capital goods data for January has indicated that business spending is likely to continue although the pace may decline to some extent.
Three Major Drivers of Business Spending
First, on Jan 30, Fed chair Jerome Powell said that the central bank will maintain its dovish monetary stance at least for the time being. Better-than expected inflation data (both consumer price index and producer price index) also strengthened investors’ confidence that the central bank will not take an aggressive stance in 2019.
Second, the 11-month long trade dispute between the United States and China is heading toward a likely resolution. If the two countries can reach an amicable solution, a major concern for global economic slowdown will be eliminated. The International Monetary Fund has identified ongoing tariff-related hassle between the United States and China as the primary factor for a perceived global economic slowdown in 2018.
Third, in order to streamline their own economies, both China and the 19-member European Union have decided to inject economic stimulus with an immediate effect. Notably, China and Eurozone economies are the two largest trading partners of the United States. Consolidation of Chinese and Eurozone economies will enable the United States to export more especially when the U.S. dollar price index is gradually diminishing.
Our Top Picks
Rising Durable Goods Orders are normally associated with stronger economic activity. At present, the U.S. economy is firmly placed on a growth trajectory albite at a slow pace. We narrowed down our search to five stocks with Zacks Rank #2 (Buy) and strong growth potential. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The chart below shows price performance of our five picks year to date.
Cisco Systems Inc. CSCO designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry worldwide. The company has an expected earnings growth rate of 17.7% for the current year. The Zacks Consensus Estimate for the current year has improved 1.3% over the last 60 days.
Harris Corp. HRS designs, develops, and manufactures single channel ground and airborne radio systems, multiband manpack and handheld radios, multi-channel manpack and airborne radios, and single-channel airborne radios. The company has an expected earnings growth rate of 22.9% for the current year. The Zacks Consensus Estimate for the current year has improved 1.7% over the last 60 days.
EMCORE Corp. EMKR offers a broad portfolio of compound semiconductor- based products for the broadband, fiber optic, satellite and terrestrial solar power markets. The company has an expected earnings growth rate of 56.1% for the current year. The Zacks Consensus Estimate for the current year has improved 5.6% over the last 60 days.
Meritor Inc. MTOR designs, manufactures, and sells supplies drivetrain, mobility, braking and aftermarket solutions for commercial vehicle and industrial markets. The company has an expected earnings growth rate of 10.9% for the current year. The Zacks Consensus Estimate for the current year has improved 5.7% over the last 60 days.
Oshkosh Corp. OSK is a leading manufacturer and marketer of access equipment, specialty vehicles and truck bodies for the primary markets of defense, concrete placement, refuse hauling, access equipment and fire & emergency. The company has an expected earnings growth rate of 17.6% for the current year. The Zacks Consensus Estimate for the current year has improved 5.8% over the last 60 days.
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