The latest survey numbers from the Institute for Supply Management (ISM) are in and they indicate that this is a great time for U.S. manufacturing. After two months of weakness, the ISM manufacturing index rebounded last month. The survey reveals that manufacturers clearly think business conditions have improved toward the end of the year.
And this improvement has come despite the burden of tariffs and a paucity of skilled manpower. Meanwhile, a temporary ceasefire was concluded between the United States and China over the weekend. This will act as a major headwind for manufacturers in the near term. Investing in stocks from the sector looks prudent.
November Rebound Defies Tariffs, Labor Shortages
The ISM manufacturing index came in at 59.3% in November, 1.6% higher than the level of 57.7% registered in October, the lowest recorded in 18 months. November’s reading also came in above the consensus estimate of 57.7%. The pace of manufacturing activity had declined in the two prior months.
The rebound was largely powered by a spurt in new orders, the index for which increased 4.7% to 62.1%. The Production Index advanced 0.7% to 60.6%. As a result, the manufacturing sector stepped up hiring or encouraged existing workers to put in additional hours overtime. Consequently, the Employment Index increased 1.6% to 58.4%.
On the flip side, the prices index declined 10.9% to 60.7%. This was a sign that raw material prices continue to be a worry for the 33rd straight month. However, the ISM survey committee’s chairman Timothy R. Fiore claimed: “Prices pressure continues, but at notably lower levels than in prior periods.”
U.S.-China Trade Truce Sign of Better Times
Overall, the report signals that American manufacturing continues to grow despite tariff pressures and labor shortages. This is in keeping with the broader economy, which grew at a 3.5% pace in the third quarter, per the latest estimate. Per the ISM, 13 of 18 manufacturing industries experienced growth last month.
According to an executive at a manufacturing unit, “Business remains strong. Tariffs impact is fully reflected in Q3 results, and initiatives are underway to move work out of China into other low-cost countries.”
Meanwhile, the United States and China concluded a highly awaited trade ceasefire over the weekend. The truce, which will last for 90 days, prevents tariff raises on both sides, seeking instead to solve the lingering trade dispute through talks. This temporary cessation of hostilities will act as a major tailwind for manufacturing, one of the biggest casualties of this trade war.
The rebound in the ISM manufacturing index reflects the optimism in the sector as we approach the end of the year. Manufacturers have managed to tide over tariff pressures and labor shortages. Now, the trade truce between the United States and China could provide a tailwind to the sector at the end of the year.
Adding manufacturing stocks to your portfolios would make for a smart move at this point. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.
EnPro Industries, Inc. NPO is a diversified manufacturer of proprietary engineered products used in critical applications.
EnPro carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The company has expected earnings growth of 62.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 6% over the last 30 days.
Harsco Corporation HSC is a services and engineered products’ company.
Harsco has a VGM Score of B. The company’s expected earnings growth for the current year is 70.3%. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Encore Wire Corporation WIRE is a low-cost manufacturer of copper electrical building wire and cable.
Encore Wire has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 25.3% for the current year. The Zacks Consensus Estimate for the current year has improved by 18.5% over the last 30 days.
The Timken Company TKR engineers, manufactures and markets bearings, transmissions, gearboxes, belts, chain and related products.
Timken carries a Zacks Rank #2 and has a VGM Score of B. The company’s expected earnings growth for the current year is 60.1%. The Zacks Consensus Estimate for the current year has improved by 0.1% over the last 30 days.
Zebra Technologies Corporation ZBRA is a designer, manufacturer and seller of a variety of automatic identification and data capture (AIDC) products.
Zebra Technologies carries a Zacks Rank #2 and has a VGM Score of B. The company has expected earnings growth of 53.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.4% over the last 30 days.
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