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Industrial Production Showing Signs of Turnaround: 5 Top Picks

Nalak Das

U.S. industrial production witnessed back-to-back monthly gains in May and June defying the second wave of the coronavirus in many states. Notably, industrial production suffered a sharp decline in March and April thanks to lockdowns imposed by the government to curb the spread of the deadly virus.

Industrial Production Surges in June

The Federal Reserve reported that industrial production climbed 5.4% in June compared with 1.4% in May. The consensus estimate was for an increase of 4.6%. Notably, U.S. industrial production tumbled 12.5% in April and 4.4% in March.

However, the metric remained 10.9% below its pre-pandemic level in February and plunged 42.6% year over year in the second quarter, marking the largest quarterly decline since the World War II.

Meanwhile, in June, out of the three broad sectors, the manufacturing sector jumped 7.2% buoyed by strong performance of motor vehicles and parts. Mining activities fell 2.9% while the output of utilities increased 4.2%.

Capacity utilization for overall industrial production in June increased to 68.6% compared with upwardly revised 65.1% in May. The consensus estimate was 68%.

U.S. Manufacturing Showing Signs of Rebound

On Jul 1, the Institute of Supply Management (ISM) reported that the U.S. manufacturing purchasing managers' index (PMI) jumped 9.5% to 52.6% in June from 43.1% in May and an 11-year low of 41.5% in April. Notably, any reading above 50 indicates expansion in manufacturing activities. The consensus estimate was 49.3%.

Per the study of the ISM, June marked the first month of expansion of the manufacturing industry since February. Moreover, June's reading was the highest since May 2019. Notably, 13 of the 18 industries tracked by ISM expanded in June. Notably, the manufacturing sector constitutes 12% of the U.S. GDP.

New orders index soared to 56.4% in June from 31.8 in May. New export orders index surged to 47.6 in June from 39.5 in May. Production index jumped to 57.3 in June  from 33.2 in May. Employment index climbed to 42.1% in June from 32.1% in May. Manufacturing added 581,000 jobs in the last two months.

On Jun 23, the IHS Markit reported that its preliminary purchasing managers' index for the U.S. manufacturing sector rose to 49.6 in June from 39.8 in May, reflecting the U.S. manufacturing industries are recovering gradually.

Our Top Picks

At this stage, we have narrowed down our search to five industrial product stocks that gained more than the broad-market S&P 500 Index in the past month and witnessed strong earnings estimates revisions in the last seven days.

A positive earnings estimate revision in the last seven days when the economy is suffering from the resurgence of COVID-19, highlights the solid business model and robust growth potential of these companies. Moreover, each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past month.

 

AGCO Corp. AGCO manufactures and distributes agricultural equipment like high horsepower tractors, utility tractors and compact tractors and related replacement parts worldwide. It offers hay tools and forage equipment also. The Zacks Consensus Estimate for the company's current-year earnings has improved 3.9% over the last 7 days. The Zacks Rank #1 stock has surged 9.9% in the past month.

Fortune Brands Home & Security Inc. FBHS provides home and security products for residential home repair, remodeling, new construction and security applications. It operates in three segments: Cabinets, Plumbing, and Doors & Security. The Zacks Consensus Estimate for the company's current-year earnings has improved 4.1% over the last 7 days. The Zacks Rank #1 stock has advanced 7.6% in the past month.

Stanley Black & Decker Inc. SWK manufactures and provides tools (power and hand tools) and related accessories, healthcare solutions, electronic security solutions, engineered fastening systems and many more items and services. The Zacks Consensus Estimate for the company's current-year earnings has improved 7.6% over the last 7 days. The Zacks Rank #2 stock has appreciated 9.5% in the past month.

Rockwell Automation Inc. ROK provides industrial automation and digital transformation solutions. It operates in two segments, Architecture & Software, and Control Products & Solutions. The Zacks Consensus Estimate for the company's current-year earnings has improved 1% over the last 7 days. The Zacks Rank #2 stock has gained 3.9% in the past month.

Berry Global Group Inc. BERY manufactures and distributes nonwoven specialty materials, engineered materials and consumer packaging products. Its services include personal care, healthcare as well as beverage and food markets in South America, North America, Asia and Europe. The Zacks Consensus Estimate for the company's current-year earnings has improved 0.7% over the last 7 days. The Zacks Rank #2 stock has increased 3.3% in the past month.

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