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U.S. Manufacturing Activity Holds Up Well: 5 Solid Buys

Tirthankar Chakraborty
United Continental (UAL) shares rose nearly 9% in the last trading session, amid huge volumes.

Both the Philly Fed and Empire State manufacturing indices displayed continued factory activity growth in some of the eastern U.S. states in March. Manufacturing activity in the United States picked up pace last month fueled by solid global growth and improved business sentiments. Manufacturers are on a hiring spree and are paying more than other jobs, reflecting sustained strength in the sector.

But, if President Trump’s protectionist policies put manufacturers under pressure, Larry Kudlow’s appointment as the new economic advisor should be a respite. After all, he has moderate views on tariffs and can certainly tone down trade war talks. Given the positives, doubling down on the hottest manufacturing stocks seems judicious.

Continued Growth in Manufacturing Survey Shows

According to the Federal Reserve Bank of Philadelphia, manufacturing activity in Pennsylvania, New Jersey and Delaware continues to expand in March. The Philadelphia Fed manufacturing index slipped to 22.3 from 25.8 in February. But, the gauge remained well above zero, which indicates improving conditions. In fact, the survey found out that nearly 37% of the manufacturers felt that the conditions have improved over the month while only 14% reported that conditions have worsened.

The indices for current new orders and shipments showed notable improvement this month. The survey showed that the current new orders index went up 11 points, with 52% of the responding firms reporting an uptick in new orders. Similarly, the index that measures the quantity of goods shipped increased 17 points.

New York Manufacturing Index Trends Higher

Manufacturing activity has also been growing in New York State this month, the Federal Reserve Bank of New York said in its latest news release. The Empire State manufacturing index that had been lagging Philly, climbed to a reading of 22.5 from 13.1 in February. The survey showed that 38% of respondents reported felt manufacturing activity had improved, while 15% felt drop in such activity. 

The new orders index increased 3 points to 16.8 and the shipments index rose 15 points to 27. Not only had this reading show strong growth in the regional manufacturing hub, firms are also optimistic about future business prospects and capital spending plans “remain strong,” added the New York Fed. 

Factories See Fastest Growth Since May 2004

Broader manufacturing activities, in fact, expanded at the fastest pace in February since May 2004, as per figures from the Institute for Supply Management (ISM). Improving global economies and firm business investment helped factories expand at a record pace. This expansion comes on the heels of a pickup in consumer spending levels. After all, consumer outlays increased at the fastest pace in the fourth quarter in more than a year.

The factory index went up 1.7 points to 60.8 in February from 59.1 in the prior month, while measures of new orders dropped to 64.2 from 65.4. However, any reading above 50 indicates expansion. Overall, 15 out of 18 manufacturing industries expended last month, mostly led by machinery, printing and primary metals.

Manufacturers Are Hiring!

Manufacturers also kept adding jobs at a faster pace than the rest of the economy. They have added 222,000 new jobs last year, resuming a recovery that had paused in 2015 and 2016. Recently, the ISM report showed that the employment gauge hit a four-month high of 59.7 in February from 54.2 in the prior month.

Manufacturers, in the meantime, are paying better than other jobs. Average weekly earnings for production and non-supervisory employees came in at $900.55 last month, more than $757.12 for the private sector taken together. Lest we forget, job additions in the manufacturing sector have a multiplier effect as it invariably leads to other jobs. Thus, a booming manufacturing sector bodes well for the overall economy.

Will Trade War Hit Manufacturers?

The manufacturing sector, however, has been under some pressure owing to Trump’s tariff plans. Trump has slapped tariffs worth $60 billion on Chinese imports, while similar taxes have been imposed on all foreign steel and aluminum items.

But, Peter Navarro, the top adviser on international economic exchanges, boosted confidence by saying that “Trump’s tough approach to global trade will not necessarily provoke retaliation from trading partners.” Moreover, Trump’s new top economic adviser, Larry Kudlow could help the United States avoid a trade war. Kudlow is primarily known for his free-trade views and is a more moderate voice in the White House.

5 Top Picks

It will, therefore, be prudent to invest in fundamentally-sound manufacturing stocks that can make the most of the promising trend. We have, thus, selected five such companies that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Applied Industrial Technologies, Inc. AIT distributes industrial products. The company offers products for maintenance, repair, and operational, as well as original equipment manufacturing customers. The stock has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings moved up 0.9% in the last 60 days. The company’s expected growth rate for the current quarter and year is 24% and 21.5%, respectively. Applied Industrial Technologies has outperformed the Zacks Manufacturing - General Industrial  industry in the past six months (+20.4% vs. +10.5%).

Deere & Company DE manufactures and distributes agriculture and turf, and construction and forestry equipment. The stock has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings rose 17.2% in the last 60 days. The company’s expected growth rate for the current quarter and year is 34.9% and 42.7%, respectively. Deere & Company has outperformed the Zacks Manufacturing - Farm Equipment industry in the last six-month period (+33.1% vs. +27.1%).

Lincoln Electric Holdings, Inc. LECO designs, manufactures, and sells welding, cutting, and brazing products. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings rose 10.3% in the last 60 days. The company’s expected growth rate for the current quarter and year is 21.6% and 24.8%, respectively. Lincoln Electric Holdings has outperformed the Zacks Manufacturing - Tools & Related Products industry in the last three-month period (+1.4% vs. -5.6%). You can see the complete list of today’s Zacks #1 Rank stocks here.

Caterpillar Inc. CAT manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives for construction, resource, and energy and transportation industries. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings jumped 14.9% in the last 60 days. The company’s expected growth rate for the current quarter and year is 61.7% and 32.9%, respectively. Caterpillar has outperformed the Zacks Manufacturing - Construction and Mining industry in the past six months (+24.8% vs. +24.2%).

Milacron Holdings Corp. MCRN manufactures, distributes, and services engineered and customized systems within the plastic technology and processing industry. The stock has a Zacks Rank #2. The Zacks Consensus Estimate for its current-year earnings moved up 6.9% in the last 60 days. The company’s expected growth rate for the current quarter and year is 21.9% and 10.7%, respectively. Milacron Holdings has outperformed the Zacks Manufacturing - Material Handling industry in the last six-month period (+26.8% vs. +12.2%).

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