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Manufacturing Data Point to Recovery: ETFs, Stocks to Consider

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The U.S. manufacturing sector saw a silver lining in February after a prolonged sluggishness. This was indicated by the recent manufacturing report from the Institute for Supply Management (ISM). As per ISM, PMI was 49.5 in February (a reading of 50 or higher points to growth), beating January’s reading by 1.3 percentage points.

Though the latest reading has come in below 50 for the fifth successive month, ISM talked of overall recovery. The data showed an increase for the second month in a row in February. There was stepped-up production and new orders seen at higher levels.

So far a stronger greenback, huge capex cuts by energy companies to fight back the plunge in oil prices and soft demand in the wake of global growth worries were keeping a check on the sector. Inventory accumulations also put a lid on factory activity

Also, construction spending jumped to the highest level since 2007 in January. Plus, solid consumer spending, a healing labor market and improving industrial production point to the fact that the U.S. economic growth probably has legs, and that the recession fear is overblown. ISM noted that out of the 18 manufacturing sectors under coverage, nine witnessed growth in February.

Needless to say, the upbeat data points once again sparked off Fed hike talks and pushed up the benchmark Treasury bond yields by 9 bps to 1.83% on March 1. While the report prompted a risk-on movement in the overall market, specific comers like industrial and construction companies need extra attention.

While almost all industrial and construction ETFs in the space experienced a rise post upbeat data, we highlight one from the each category that gained the most.

ETF Picks

RBA American Industrial Renaissance ETF (AIRR)

This fund provides exposure to the small and mid cap stocks in the industrial and community banking sectors by tracking the Richard Bernstein Advisors American Industrial Renaissance Index.  The portfolio results in a basket of 39 securities, which are widely spread out across components with none holding more than 4.80% of assets (read: Invest in America with These 4 ETFs).

The fund is often overlooked by investors as depicted by its AUM of $30 million and average daily volume of about 19,000 shares. The Zacks Rank #3 (Hold) fund with a High risk outlook charges 70 bps in fees per year and has lost 2.1% so far this year (as of March 1, 2016). However, AIRR was up over 2.4% on March 1, 2016.

Dynamic Build & Construction (PKB)

As far as construction companies are concerned, several homebuilding companies like ETRACS ISE Exclusively Homebuilders ETN (HOMX), iShares U.S. Home Construction ETF (ITB) and SPDR Homebuilders ETF (XHB) returned better than PKB post data release (read: Time to Buy Housing ETFs Despite Mixed D.R. Horton Earnings?).

But here we focus more on broad-based construction activities, rather than having a concentrated approach to housing companies. PKB has just 10% exposure in home builders while engineering and construction companies take the top spot with about 23% of the fund.

PKB seeks to track the performance of the Dynamic Building & Construction Intellidex Index. It holds a
basket of 30 stocks and has an expense ratio of 0.63%. The product has amassed nearly $59.4 million in its asset base and trades in a light volume of around 18,000 million shares per day on average. The ETF has lost 4.2% in the year-to-date frame, but added 2.2% on March 1. It has a Zacks ETF Rank #2 with a High risk outlook.
Stock Picks
Many construction stocks will definitely enjoy price appreciation from recovering fundamentals. We highlight two stocks with a top Zacks Rank #1 (Strong Buy) and a Momentum Style Score of A or B (at the time of writing) that are expected to outperform their peers in the months ahead.
Gibraltar Industries Inc. (ROCK)
This New York-based company manufactures and distributes building products in North America, Europe, and Asia. The stock has a Growth score of ‘A’, Momentum score of ‘B’ and a Value score of ‘B’. The underlying sector of the stock is in the top 22% of the Zacks Industry Universe.  ROCK is off 0.6% so far this year but added about 2.4% on March 1.

This Oklahoma-based company manufactures and sells air-conditioning and heating equipment in the United States and Canada. The stock has a Growth score of ‘B’ and Momentum score of ‘A’. However, the stock does not score on value with an ‘F’. The underlying sector of the stock is in the top 5% of the Zacks Industry Universe.  AAON is up 9.9% so far this year and advanced about 2.9% on March 1.
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