On Jul 3, the Commerce Department reported that the U.S. factory orders for the month of May rebounded and entered the positive territory following a stiff decline in April. The increase in May marked the third rise in the past four months. This indicates that the U.S. manufacturing sector, which constitutes around 12% of its GDP, is increasing capital spending driven by massive tax overhaul, deregulatory measures and strong domestic & global economy.
The worldwide demand for manufacturing products is on the rise. U.S. manufacturing industry is benefiting from strong global demand, which is leading to a sharp rise in factory orders. Against this backdrop, it will be prudent to invest in stocks that are poised to gain from the solid factory orders data.
Robust Factory Orders in May
U.S. factory orders rose 0.4% in May, buoyed by strong demand for machinery and military wares. This was in contrast to a 0.4% (after revision) decline in April. New orders for U.S. manufactured goods in May increased $1.8 billion to $498.2 billion. Meanwhile, shipments of manufactured goods inched up 0.6% ($2.8 billion) to $496.1 billion. This marked the 12th month of increase in the last 13 months.
On Jul 2, the Institute for Supply Management (ISM) reported that the U.S. manufacturing index rose to 60.2% in June from 58.7% in May. The June reading was highest in last four months as well as better than the consensus estimate of 58.4. Notably, readings over 50% indicate more companies are expanding instead of shrinking. Per the ISM report, 17 out of 18 industries witnessed expansion last month.
Immediate Concerns
The U.S. manufacturing sector is currently plagued with three concerns. First, tariffs imposed on steel and aluminum and several industrial intermediary products have raised input costs. Moreover, ongoing trade related conflicts between the United States and its major trading allies like China, European Union, Canada, Mexico, to name a few are deteriorating with each passing day. As a result of these trade conflicts, U.S. exports have become vulnerable to retaliatory tariffs.
Second, the U.S. labor market is at its sturdiest since recession. The unemployment rate declined from 3.9% in April to 3.8% in May, its lowest in 18 years. The stiff decline in the unemployment rate indicates the extent to which the labor market has tightened, resulting in shortages of skilled labor. This may result in hike in wages.
Third, the Fed has increased its 2018 PCE (personal consumption expenditure) inflation projection from 1.9% in March to 2.1%. However, the core PCE inflation –the key inflation measurement tool and the central bank’s preferred inflation barometer – was up to 2% from 1.9% in March. This may force the central banks to raise interest rate consequently increasing the cost of funds.
Future Looks Bright Despite Concerns
Tax-reforms and deregulation policies of the Trump administration are likely to act as major catalysts. The corporate tax rate was lowered from 35% to 21%. President Trump has also promised to remove 75% of the regulations during his tenure. Trump’s business-friendly policies ought to help the private employers.
Moreover, the government has taken a decision to spend a whopping $1.5 trillion on several infrastructure projects like constructing new roads, bridges, highways, railways and waterways across the country over a period of 10 years. This project will generate significant demand for manufacturing sector.
Our Top Picks
Many economists believe that investment growth is likely to pick up in the near term. Solid macro-economic fundamentals, government’s tax reform and deregulation proposals along with sustained strong earnings performance are major tailwinds for the U.S. economy. At this stage, investment in stocks likely to gain from strong factory orders is a lucrative option.
We narrowed down our search to five stocks with Zacks Rank #1 (Strong Buy) and strong Growth Potential. You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below depicts price performance of our five picks in the last three months.
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Twin Disc Inc. TWIN designs, manufactures and sells heavy duty off-highway power transmission equipment. The company has expected earnings growth of 319.5% for current year. The Zacks Consensus Estimate for the current year has improved by 104.5% over the last 60 days.
Regal Beloit Corp. RBC is a leading manufacturer of electrical and mechanical motion control and power generation products serving markets globally. The company has expected earnings growth of 20.7% for current year. The Zacks Consensus Estimate for the current year has improved by 5.6% over the last 60 days.
Actuant Corp. ATU is a diversified industrial company serving customers from operations in more than 30 countries. The company has expected earnings growth of 27.7% for current year. The Zacks Consensus Estimate for the current year has improved by 2.9% over the last 60 days.
Zebra Technologies Corp. ZBRA builds tracking technology and solutions that generate actionable information and insight, giving companies unprecedented visibility into their businesses. The company has expected earnings growth of 39.7% for current year. The Zacks Consensus Estimate for the current year has improved by 5.9% over the last 60 days.
Domtar Corp. UFS is a leading provider of a wide variety of fiber-based products including communication, specialty and packaging papers. The company has expected earnings growth of 39.2% for current year. The Zacks Consensus Estimate for the current year has improved by 10.4% over the last 60 days.
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