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4 Stocks Set to Gain on Solid Jump in Factory Orders

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Manufacturing activity is growing at a fast pace in the United States, even though economic data is hinting at a slowing economy. Rising costs of raw materials and a supply-chain crisis have not yet curtailed manufacturing activity. In fact, it increased at a faster pace than expected in May, as recent data shows a solid jump in factory orders.

Also, new orders for U.S. manufactured goods have been rising steadily despite the Fed’s aggressive rate-hike policy that has seen people spending cautiously. Given this situation, stocks like The LGL Group, Inc. (LGL - Free Report) , A. O. Smith Corporation (AOS - Free Report) , DXP Enterprises, Inc. (DXPE - Free Report) and Nordson Corporation (NDSN - Free Report) are likely to benefit in the near term.

Factory Orders Rise in May

The Commerce Department said on Jul 6 that factory orders for May jumped a solid 1.6% or $8.4 billion to $543 billion, beating analysts’ expectations of a rise of 0.5%. May’s jump follows a 0.7% rise in factory orders in April.

Manufacturing accounts for 12% of the U.S. economy and May’s jump once again proves the continued demand for durable goods. Factory orders have now increased in 21 out of the past 22 months, indicating that demand for U.S.-made factory goods is still high despite the slowdown indicated by economic data.

The jump in orders was across a range of categories, with notable increases in metals, machinery, transportation equipment, computers and electronic products. Orders for computers and electronic goods increased 0.5% in May.

The Commerce Department also reported a 1.8% increase in shipments of manufactured goods in May.

Orders for non-defense capital goods, excluding airplanes, viewed as a gauge of business spending plans on equipment, grew 0.6% in May rather than the 0.5% that was previously reported, according to the Commerce Department.

Manufacturing Sector on Solid Ground

Manufacturing activity is still going strong despite challenges like rising raw material costs and supply-chain crisis. Higher demand is driving orders for factory goods, and rising costs, despite being a major determinant, haven’t made much of a difference.

Even though the GDP shrank at an annualized pace of 1.5% in the first quarter, strong company spending on equipment supported domestic demand.

The rise in factory orders in May comes days after the Commerce Department reported that orders for long-lasting durable goods manufactured in U.S. factories grew a solid 0.7% or $1.9 billion on a month-over-month basis in May to $$267.2 billion. Economists had not expected the data to change.

Excluding defense, orders for durable goods increased 0.6%. Orders for transportation equipment, which play an important role in driving overall durable goods increased 0.8% in May after growing 0.7% in April.

Orders for transportation equipment, a key factor in the growth of durable goods overall, grew 0.8% in May.

The peak of the COVID-19 pandemic saw people spending more on capital goods as they were working and learning remotely. This resulted in an increase in demand, which is currently putting pressure on the supply chain.

That said, people have once again started spending more on services now with the economy continuing to reopen. The rise in spending on services, however, hasn’t impacted demand for consumer goods, which is helping drive factory orders.

The demand for goods is likely to continue in the coming months too, giving a boost to factor orders.

Our Choices

Factory orders should continue to grow as the U.S. economy reopens further. This thus makes it a good time to invest in fundamentally sound stocks that stand to benefit from rising orders. We have handpicked five such stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The LGL Group, Inc. operates through its principal subsidiary M-tron Industries, Inc., which designs and manufactures customized electronic components used primarily to control the frequency or timing of electronic signals in communications systems. LGL has operations in Orlando, Florida, Yankton, South Dakota, Yantai, China and Noida, India.

The LGL Group’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 27.8% over the past 60 days. LGL has a Zacks Rank #2.

A. O. Smith Corporation is one of the leading manufacturers of commercial and residential water heating equipment and water treatment products in the world. AOS specializes in innovative and energy-efficient solutions and products, developed and sold on a global platform.

A. O. Smith’s expected earnings growth rate for the current year is 19.9%. The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the past 60 days. AOS has a Zacks Rank #2.

DXP Enterprises, Inc. is a leading products and services distributor that adds value and total cost-saving solutions to industrial customers throughout the United States, Canada, Mexico and Dubai. DXPE provides innovative pumping solutions, supply-chain services and maintenance, repair, operating and production services. DXP Enterprises' business segments include Service Centers, Innovative Pumping Solutions and Supply Chain Services.

DXP Enterprises' expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved more than 100% over the past 60 days. DXPE has a Zacks Rank #1.

Nordson Corporation is one of the leading manufacturers as well as distributors of products and systems designed to dispense, apply and control adhesives, coatings, polymers, sealants, biomaterials, and other fluids. NDSN’s product line includes single-use components, stand-alone units for low-volume operations and microprocessor-based automated systems for high-speed, high-volume production lines. Nordson Corporationhas operations in over 35 countries.

Nordson Corporation’s expected earnings growth rate for the current year is 20.4%. The Zacks Consensus Estimate for current-year earnings has improved 3.1% over the past 60 days. NDSN has a Zacks Rank #2.