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ETFs & Stocks Set to Surge on Robust Industrial Production

Sweta Killa
The line-up of luxury brands after the expansion of Toronto Premium Outlets will help Simon Property Group (SPG) bank on the improving spending habits of wealthier customers amid progressing economy.

After first-quarter slowdown, the U.S. economy regained momentum as depicted by bouts of encouraging data in recent months. The latest upbeat industrial production data made the case even stronger as the American economy continues to look healthy despite trade tensions.

This is especially true as industrial production rose 0.6% in June after declining 0.5% in May, buoyed by a sharp rebound in manufacturing and continued gains in mining output. With this, industrial production increased 6% in the second quarter, more than the double the growth of 2.4% recorded in the first (read: Top-Ranked Sector ETFs to Buy for Q3).  

Inside the Numbers

Manufacturing output surged 0.8% in June driven by 7.8% growth in motor vehicle production. Increase in the production of wood, computer and electronic products as well as aerospace and miscellaneous transportation equipment also added to growth. In the second quarter, as a whole, output climbed 1.9% compared with 1.7% in the first quarter. Manufacturing production has been rising since mid-2016 and has increased 4.2% since May 2016. It gained 22% from a recession low in June 2009, according to Fed data.

Mining output increased 1.2% in June to a record high, representing the fifth consecutive monthly gain on increased production by oil and gas companies. Meanwhile, industrial capacity utilization inched up to 78% in June from 77.7% in May.

Any Threats?

The escalating trade tensions between the United States and its major trade partners are a major cause of concern. The International Monetary Fund warned that tit-for-tat tariff threats will derail global economic recovery, leading to a slowdown in exports and business spending. This is taking toll a on the outlook for the industrial sector (read: Trump Renews Global Trade War Fears: ETF Winners & Losers).

The shortage of workers could also pose a risk to production with factory surveys suggesting some crunch in the supply chain. Additionally, a strengthening dollar that makes U.S. products more expensive abroad added to the woes.

However, these headwinds are outweighed by the strong earnings optimism and accelerating economic growth. With Q2 earnings kicking off, many larger industrial companies and manufacturers are expected to report strong results. Additionally, the U.S. economy is expected to generate GDP growth as high as 5.2% for the third quarter, more than double the first quarter’s 2% growth.

How to Play?

Given this, many industrial ETFs and stocks are poised to surge in the coming weeks owing to the solid fundamentals. Below we highlight some of these.

ETFs

While there are several ETFs available in this space, we have highlighted three ETFs that have gained over the past month and are expected to keep up their momentum in the coming months. Further, these funds have a solid Zacks ETF Rank #2 (Buy), which suggests that the outperformance will continue.

Industrial Select Sector SPDR XLI

This is the most popular ETF in the space with AUM of $12.6 billion and an average daily volume of nearly 13.6 million shares. The fund follows the Industrial Select Sector Index, holding 70 stocks in its basket with relatively higher concentration on the top firm. About 28.6% of the assets is allocated to aerospace & defense while industrial conglomerates, machinery, and road & rail make up for a double-digit share each. This ETF charges 13 bps in fees per year and has risen about 0.7% in the past month.

Vanguard Industrials ETF VIS

This fund follows the MSCI US IMI Industrials 25/50 Index and holds about 350 securities in its basket with none accounting for more than 6.5% of the assets. From an industrial look, aerospace and defense takes the top spot at 23.6% followed by industrial conglomerates at 13.1%. The fund manages $3.6 billion in its asset base and charges 10 bps in annual fees. Volume is moderate as the product exchanges 141,000 shares a day on average. VIS has gained 0.5% in the past month (see: all the Industrial ETFs here).

Fidelity MSCI Industrials Index ETF FIDU

This fund tracks the MSCI USA IMI Industrials Index, holding 346 stocks in its basket with none accounting for more than 7% share. Aerospace & defense makes up for the top sector with one-fourth of the portfolio, followed by machinery (18.5%) and industrial conglomerates (13.5%). The product has amassed $453.1 million in its asset base while trading in good volumes of around 170,000 shares a day on average. It charges 8 bps in annual fees from investors and has gained 0.5% in a month.

Stocks

We highlight three stocks with a top Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Momentum Score of A or B that are expected to outperform their peers in the months ahead.

The Manitowoc Company Inc. MTW

This Zacks Rank #1 company is a leading manufacturer of cranes that serve the infrastructure, residential & commercial construction, petrochemical, industrial, power/utility and military end markets. The stock, which has a Momentum Score of B, has witnessed upward earnings estimate revision of a couple of cents in the past 30 days for 2018. It has an attractive earnings growth rate of 306.04% for this year and has gained 4.4% in a month. You can see the complete list of today’s Zacks #1 Rank stocks here.

Terex Corporation TEX

This Zacks Rank #2 company is a global manufacturer of lifting and material processing products and services that delivers lifecycle solutions to maximize customer return on investment. The stock with a Momentum Score of A saw a 9.7% increase in the past four weeks. The uptrend is likely to continue given that the earnings estimates for this year have been revised up by a penny over the past 30 days. Further, Terex has an estimated earnings growth rate of 115.56% for this year.

AZZ Inc. AZZ

This Zacks Rank #1 company is a global provider of metal coating services, welding solutions, specialty electrical equipment and highly engineered services to the markets of power generation, transmission, distribution and industrial in protecting metal and electrical systems used to build and enhance the world's infrastructure. The company saw its earnings estimates rising 19 cents for the fiscal (ending February 2019) over the past 30 days, representing year-over-year growth of 62.96%. The stock has a Momentum Score of B and has gained about 17.2% in the past four weeks.

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AZZ Inc. (AZZ) : Free Stock Analysis Report
 
VIPERS-INDUS (VIS): ETF Research Reports
 
SPDR-INDU SELS (XLI): ETF Research Reports
 
FID-INDUSTL (FIDU): ETF Research Reports
 
Terex Corporation (TEX) : Free Stock Analysis Report
 
The Manitowoc Company, Inc. (MTW) : Free Stock Analysis Report
 
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