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U.S. Business Spending Likely to Remain Strong: 5 Top Picks

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Wall Street has been delivering impressively so far this year as bulls are roaring month after month. However, of late, a section of market participants is concerned that the rapidly spreading Delta variant of COVID-19 will create a hurdle for the pace of economic recovery in the near future.

Market watchers are primarily concerned that the Delta variant together with the gradual fading out of the fiscal stimulus will affect consumer spending, the largest driver of the U.S. economy. A significant 1.1% drop in July’s retail sales is an indication.

Nevertheless, some recently released economic data have clearly shown that business spending is likely to remain solid in the second half of 2021. This should compensate for any material decline in consumer spending, if it happens at all.

Business Spending to Remain Solid

On Aug 25, the Department of Commerce reported that the durable goods orders fell 0.1% in July after gaining 0.8% in June. However, the consensus estimate was for a drop of 0.5%.

Moreover, new orders for core capital goods (non-defense capital goods excluding aircraft) remained the same in July after rising 1% in June. This metric is a closely watched proxy for business investment plan. Shipments of core capital goods rose 1% in July after rising 0.6% in June.  This metric is used to calculate equipment spending in GDP measurement.

On Aug 20, the Federal Reserve reported that industrial production gained 0.9% in July compared with a 0.2% rise in June. The consensus estimate was for an increase of 0.5%. The manufacturing sector advanced 1.4% buoyed by the strong performance of motor vehicles and parts. Production at auto plants climbed 11.2% in July. Excluding the auto sector, manufacturing moved up 0.7% in July.

The Institute of Supply Management’s manufacturing purchasing managers’ index stayed above 50% for 14 consecutive months in a row up to the last reported data for July 2021. Any reading above 50% indicates an expansion in manufacturing activities. The manufacturing sector constitutes nearly 12% of the U.S. GDP.

Future Catalysts

U.S. manufacturers across sizes are expanding their scale of operations and hiring more despite soaring wages and salaries to cater to robust demand. The personal savings of Americans are around an astonishing $2 trillion.

The sky-high savings are allowing people to indulge in their demands that were pent up during lockdowns and in turn compelling businesses to expand their scale of operations. Business organizations are increasingly seeking consultation in a bid to protect employees, and stay close to their customers and shareholders.

Several large and mid-sized companies are shifting from conventional data solutions to technical and domain-specific expertise, data analytics solutions, financial consultancy and operational consultancy services.

In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures that will enable them to provide flexible and easily adoptable hybrid solutions.

Our Top Picks

At this stage, we have narrowed down our search to five industrial product stocks that have strong growth potential for the rest of 2021 and witnessed strong earnings estimates revisions within the last 30 days.

Year to date, these stocks have provided double-digit returns. Moreover, each of our picks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows the price performance of our five picks year to date.

Zacks Investment Research
Image Source: Zacks Investment Research

Deere & Co. (DE - Free Report) is likely to benefit from growth in non-residential investment and strong order activity from independent rental companies. Focus on investing in new products equipped with the latest technology and features to help make farming automated and to expand in precision agriculture will drive growth in the long haul.

The company has an expected earnings growth rate of more than 100% for the current year (ending October 2021). The Zacks Consensus Estimate for current-year earnings improved 1.9% over the last 7 days. The stock has jumped 39.9% year to date.

Dover Corp. (DOV - Free Report) is poised to benefit from strong end-market demand, bookings rates and robust backlog in the current year. Strong growth in pumps and process solutions, fueling solutions, food retail, marking & coding and automotive aftermarket businesses is aiding the company. Its cost-reduction initiatives, acquisitions, e-commerce, new product development and inorganic investment in core business platforms should also drive growth.

The company has an expected earnings growth rate of 32.6% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.8% over the last 30 days. The stock has climbed 38.2% year to date.

The Middleby Corp. (MIDD - Free Report) is poised to benefit from increasing orders across its segments along with a robust backlog in the quarters ahead. Also, its efforts to broaden the product portfolio and technological advancement are likely to be advantageous. Synergistic gains from the acquired assets might be beneficial as well, going forward.

The company has an expected earnings growth rate of 68.8% for the current year. The Zacks Consensus Estimate for current-year earnings improved 1.9% over the last 30 days. The stock has soared 42.1% year to date.

Ingersoll Rand Inc. (IR - Free Report) is poised to gain from a solid product portfolio, innovation capabilities and liquidity position. Exposure in various end markets, buyouts and gains from accelerated synergy actions are likely to aid as well. Effective pricing actions are likely to protect against woes related to high raw material, logistics and other expenses as well as strategic growth investments.

The company has an expected earnings growth rate of 18.1% for the current year. The Zacks Consensus Estimate for current-year earnings improved 6.4% over the last 30 days. The stock has surged 14.4% year to date.

IDEX Corp. (IEX - Free Report) poised to gain from a diversified business structure, solid product portfolio, execution abilities and growth investments (more exposure in emerging markets, productivity enhancement and digitization).

It serves customers in various markets, including life science, fire and rescue, water & wastewater, chemical, agricultural, food, general industrial, and energy industries. As a result, gains in one or more markets will help in offsetting the weakness in the other markets.

The company has an expected earnings growth rate of 22.2% for the current year. The Zacks Consensus Estimate for current-year earnings improved 2.3% over the last 30 days. The stock has advanced 13.7% year to date.