The U.S. manufacturing is showing signs of recovery after struggling for more than a year. According to the study of the Institute for Supply Management (ISM), contraction of manufacturing activities started since August 2019 owing to a prolonged trade war with China.
While the manufacturing industry expanded in the first two months of this year, it again contracted in March as lockdowns were imposed in order to curb the outbreak of the coronavirus. Meanwhile, surprising many economists and financial experts, U.S. manufacturing again expanded in June despite the resurgence of COVID-19 cases in several states.
Encouraging Data for U.S. Manufacturing
On Jul 1, the 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.
Despite the resurgence of the deadly coronavorus in various states, it is unlikely that a second round of lockdown will be imposed. All 50 states have reopened their economies in some form since the last week of May. Better-than-expected economic data, despite the fact that the aggregate economy is still way below its pre-lockdown level of activities, have shown fundamental stability.
As the U.S. and major global economies reopen more of their economies, the manufacturing sector should strengthen its position as export demand for high-tech manufacturing products of the country will likely increase. The Fed is likely to keep the benchmark as low as 0-0.25% till 2022. A low interest rate will significantly reduce the cost of capital and will make U.S. currency cheaper in the foreign exchange market, making U.S. products more competitive.
Our Top Picks
At this stage, we have narrowed down our search to five manufacturing stocks that popped more than 25% in the past three months and still have momentum for the current year. 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 performancew of our five picks in the past three months.
II-VI Inc. IIVI develops, manufactures, and markets engineered materials, and optoelectronic components and devices worldwide. It operates through three segments: II-VI Laser Solutions, II-VI Photonics, and II-VI Performance Products.
The Zacks Rank #1 company has expected earnings growth of 49.5% for the current year (ending June 2021). The Zacks Consensus Estimate for the current year has improved 8.9% over the last 60 days. The stock price has rallied 65.4% in the past three months.
Veeco Instruments Inc. VECO is engaged in the design, development, manufacture and support of thin film process equipment primarily sold to make electronic devices worldwide.
The Zacks Rank #1 company has expected earnings growth of more than 100% for the current year. The Zacks Consensus Estimate for the current year has improved 17.2% over the last 60 days. The stock price has jumped 39.7% in the past three months.
MKS Instruments Inc. MKSI provides instruments, subsystems, and process control solutions that measure, monitor, deliver, analyze and power critical parameters of manufacturing system worldwide. It operates through two segments: Vacuum and Analysis, and Light and Motion.
The Zacks Rank #1 company has an expected earnings growth rate of 8.2% for the current year. The Zacks Consensus Estimate for the current year has improved 0.2% over the last 60 days. The stock price has climbed 33.4% in the past three months.
Chart Industries Inc. GTLS manufactures and sells engineered equipment and packaged solutions and provides value-add services for the energy and industrial gas industries worldwide. It operates through three segments: Energy & Chemicals, Distribution & Storage Western Hemisphere, and Distribution & Storage Eastern Hemisphere.
The Zacks Rank #2 company has expected earnings growth of 2.4% for the current year. The Zacks Consensus Estimate for the current year has improved 4% over the last 60 days. The stock price has soared 78.7% in the past three months.
AZZ Inc. AZZ provides galvanizing and metal coating services, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets.
The Zacks Rank #2 company has expected earnings growth rate of 4.4% for the current year. The Zacks Consensus Estimate for the current year has improved 0.4% over the last 60 days. The stock price has surged 25.7% in the past three months.
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