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Forget Xylem, Invest in These 4 Industrial Stocks Instead

Zacks Equity Research

Recently released data showed an increase in the U.S. manufacturing index. Amid weak export demand, surge in new orders and solid output rates played important roles in driving the index higher.

We believe that U.S. manufacturing companies stand to gain from demand for highly sophisticated technologies in manufacturing process, focus on infrastructural development in the country and demand for remodeling activities. Moreover, the growing adoption of e-retailing has created business opportunities.

However, the adverse impact of prevailing global uncertainties, including Brexit and others, as well as weakness in the housing market in the United States, unfavorable movement in foreign currencies, high labor costs, commodity inflation and rising freight charges cannot be overlooked.

To add to the woes, the country’s strained trade relations (due to imposition of import tariffs) with foreign nations, especially China, has been hurting corporate margins. Industrial production too has been weak of late, with just 0.4% year-over-year gain recorded for August 2019. The Zacks Industrial Products sector is currently placed in the bottom 7% (with rank of 15) of total 16 Zacks sectors. The sector has declined roughly 5.1% in the past three months and 10.3% in a year’s time.

The industrial space currently offers some good investment options with solid earnings growth potential while there are others that should be preferably avoided at present. One industrial stock that should be avoided at present is Xylem Inc. XYL. The Rye Brook, NY-based company provides water solutions worldwide. It currently carries a Zacks Rank #4 (Sell) and has a VGM Score of D, which lowers the stock’s appeal.

In the past three months, Xylem’s share price has declined 5.4% compared with the sector’s fall 5.1%, the Zacks Manufacturing – General Industrial industry’s decline of 0.3% and the S&P 500 growth of 2.6%.

Much of the damage has been caused by the company’s weak outlook for 2019. End-market conditions, especially industrial, oil and gas/mining and residential, are predicted to be difficult for the company. Also, business in the Middle East and Europe will be weak while that in China will slow down. Further, cost inflation can impact the company’s margins. Forex poses a threat too.

For 2019, Xylem has tightened its adjusted earnings per share guidance from the previously $3.12-$3.32 to $3.12-$3.22, with the mid-point falling from $3.22 to $3.17. Revenues are predicted to be $5.29-$5.38 billion versus the previously stated $5.3-$5.4 billion. Adjusted operating margin is expected to be 14.3-14.5%, down from the previously mentioned 14.5-14.9%.

In the past 60 days, the company’s earnings estimates have been lowered by seven brokerage firms for 2019 and by six for 2020. Currently, the Zacks Consensus Estimate for earnings is pegged at $3.16 for 2019 and $3.64 for 2020, reflecting decline of 1.9% and 2.2% from the respective 60-day ago figures.

We now know why it is prudent for investors to avoid investing in Xylem. Below we discuss briefly four investment-worthy manufacturing industrial stocks.

Crawford United Corporation CRAWA: The stock of this Cleveland, OH-based company has gained 4.8% in the past three months. The stock currently sports a Zacks Rank #1 (Strong Buy). Its investment appeal is further accentuated by a favorable VGM Score of A.

Also, the Zacks Consensus Estimate for the company’s current-year and next-year earnings has been revised 7.8% and 11.3% upward, respectively in the past 60 days.

Mitsubishi Heavy Industries, Ltd. MHVYF: Based in Tokyo, Japan, shares of this company have returned 13.3% so far this year. The stock currently is Zacks #1 Ranked. You can see the complete list of today’s Zacks #1 Rank stocks here.

In the past 90 days, the Zacks Consensus Estimate for the company’s current-year and next-year earnings increased 23.8% and 7.7% respectively.

Chart Industries, Inc. GTLS: The company is based in Ball Ground, GA and currently carries a Zacks Rank #2 (Buy). Also, it has a VGM Score of B.
    
In the past 60 days, the Zacks Consensus Estimate for the company’s current-year earnings has witnessed no change while the same for 2020 has risen 0.8%.

Graham Corporation GHM: The company, based in Batavia, NY, currently carries a Zacks Rank #2. In the past 60 days, the Zacks Consensus Estimate for the company’s current-year and next-year earnings has been revised 46.3% and 28% upward, respectively.

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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