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U.S. Manufacturing Headed for V-Shaped Recovery: 5 Top Picks

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The U.S. manufacturing sector struggled throughout 2019 from a prolonged trade and tariff tussle between the United States and China. However,  it is showing signs of a V-shaped recovery this year, defying coronavirus-induced devastations.

According to the Institute for Supply Management (ISM), the manufacturing sector, which constitutes around 12% of the U.S. GDP, has been on an uptrend for the last four months. Notably, the emergence of the second wave of coronavirus failed to derail the steady improvement in the sector.

U.S. Manufacturing Rebounds Impressively

On Sep 1, the ISM reported that the U.S. manufacturing purchasing managers' index (PMI) for August came in at 56, its highest reading since January 2019. The consensus estimate was 54.5 for August  while July's PMI was 54.2. Notably, any reading above 50 indicates expansion in manufacturing activities.

Moreover, August was the fourth consecutive month of manufacturing uptrend after the index hit an 11-year low of 41.5% in April. Furthermore, 15 of the 18 industries tracked by ISM expanded in August, up from 13 in the previous month.

The ISM reported that manufacturing production jumped to 63.3 in August from 62.1 in July. Meanwhile, new orders climbed to 67.6 in August from 61.5 in July. the employment index rose to 46.4 in August from 44.2 in July. However, the index is still below 50, implying job retrenchment in this sector.  

Per Tim Fiore, chairman of the ISM’s business survey committee, August marked “the first full month of operations after supply chains restarted and adjustments were made for employees to return to work.”

Moreover, the IHS Markit reported that its final PMI for the U.S. manufacturing sector rose to 53.1 in August from 50.9 in July, reflecting that the U.S. manufacturing industries are turning out gradually. This was the fastest monthly expansion since January 2019.

Near-Term Drivers

A series of economic data from April to August like the job market, the housing market, vehicle sales, retail sales, manufacturing and services along with better-than-expected second-quarter GDP and corporate earnings revealed that the pandemic-led economic devastations were not as severe as expected earlier.

The U.S. economy will gradually return to the pre-pandemic level as more parts of it reopen. These positives will set in motion cyclical industries such as manufacturing.

As the U.S. and major global economies reopen, the manufacturing sector should strengthen as export demand for high-tech manufacturing products of the country will likely increase. Finally, the Fed has decided to keep the benchmark interest rate as low as 0-0.25% for a longer period than previously expected.

A low interest rate will significantly reduce the cost of capital and make U.S. currency cheaper in the foreign exchange market, making the country's products more competitively priced.

Our Top Picks

At this stage, we have narrowed down our search to five manufacturing stocks that have rallied in the past four months and saw encouraging earnings estimate revision within the last 60 days. This indicates investor optimism over these companies' business potential for the rest of this year.

Moreover, these stocks are regular dividend payers, which will act as a regular income stream to investors in market's downturn. Each of our picks sports a Zacks Rank #1 (Strong 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 four months.

 

Deere & Co. (DE - Free Report) manufactures and distributes farm equipment worldwide. The company operates through three segments: Agriculture and Turf, Construction and Forestry, and Financial Services. The Zacks Consensus Estimate for its current-year earnings has improved 19% over the last 30 days. The stock price has soared 59% in the past four months and has a dividend yield of 1.44%.

AGCO Corp. (AGCO - Free Report) 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 its current-year earnings has improved 4.8% over the last 7 days. The stock price has jumped 48.6% in the past four months and has a dividend yield of 0.87%.

Astec Industries Inc. (ASTE - Free Report) manufactures and sells equipment and components for the road building, aggregate processing, geothermal, water, oil and gas and wood processing industries in the United States and internationally. The Zacks Consensus Estimate for its current-year earnings has improved 50.4% over the last 60 days. The stock price has climbed 42.7% in the past four months and has a dividend yield of 0.82%.

EnPro Industries Inc. (NPO - Free Report) designs, develops, manufactures, and markets engineered industrial products worldwide. The company operates in two segments, Sealing Products and Engineered Products. The Zacks Consensus Estimate for its current-year earnings has improved 44.4% over the last 60 days. The stock price has surged 32.1% in the past four months and has a dividend yield of 1.78%.

Kaman Corp. (KAMN - Free Report) operates in the aerospace and industrial distribution markets. It operates through two segments, Distribution and Aerospace. The Zacks Consensus Estimate for its current-year earnings has improved 13% over the last 30 days. The stock price has advanced 20.1% in the past four months and has a dividend yield of 1.80%.

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