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4 Stocks to Catch the Industrial Production Recovery

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Industrial production rebounded in September from a decline in August, adding to the tally of encouraging economic data signifying improvement in the U.S. economy during the third quarter. The Federal Reserve reported that the increase in industrial production during the third quarter was the best in the year so far. Rise in manufacturing and mining outputs played a crucial role in boosting overall industrial production last month.

Rebound in Industrial Production

Industrial production rose 0.1% last month, rebounding from 0.5% decline in August on the back of 0.2% gain in manufacturing and 0.4% increase in mining productions. Moreover, industrial production during the last quarter rose at an annual pace of 1.8%, the highest since the third quarter of 2015. Strong gains in utilities production despite a decline last month and a rise in manufacturing output primarily boosted industrial production last quarter. Utilities and manufacturing outputs registered gains of 0.9% and 6.2% during the third quarter, respectively.

Among the major market groups, it was non-industrial supplies that primarily led industrial production higher.  It was also boosted by a strong rebound in construction output. After falling 1.4% in August, production at the construction segment rose 0.8% last month. Separately, capacity utilization rose to 75.4% last month from 75.3% registered in August. While capacity utilization in the manufacturing sector rose 0.1% to 74.9% in September, the same in the mining segment increased 0.5% to 75.5%.

Will the Rebound Sustain?

Though up slightly in September, capacity utilizations remain significantly below the long-term (1972–2015) average of 80.0%. This is an indication that there is enough room for the economy to expand its capacity in order to boost industrial production further in the days ahead. However, it will entirely depend on near-term prospects of the U.S. economy. Recent economic data including ISM Manufacturing Index and factory orders signal toward improvement in the U.S. economy in the second half of the year.

The ISM Manufacturing Index increased 2.1 percentage points to a level of 51.5% during the month of September. The reading exceeded the level of 49.4% registered during the month of August. Any reading above 50 indicates expansion in manufacturing activity. Strong gains in new orders led manufacturing activity to rebound last month. Additionally, factory orders rose 0.2% in August after advancing 1.4% in July. Though non-farm payrolls decreased last month, the labor market remained on a strong footing.

Separately, other economic data including nine-year high consumer confidence and strong gain in retail sales also indicate that the economy is rebounding. These positive indications along with a recovery in oil prices in recent times have left little doubt about the sustainability of last month’s rebound.

4 Industrial Stocks to Buy

Banking on this impressive backdrop, selecting potential stocks from the industrial products domain might be a prudent option for investors. However, picking winning stocks may prove to be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and a VGM score of ‘A.’

Worthington Industries, Inc. (WOR - Free Report) is one of the leading diversified metal processing companies. This Zacks Rank #1 (Strong Buy) stock has an expected earnings growth rate of 27% for the current year compared with the industry average of 1.8%. Its earnings estimate for the current year has surged 18.9% over the last 30 days.

NN Inc. (NNBR - Free Report) is an independent manufacturer and supplier of high quality, precision steel balls and rollers to both domestic and international anti-friction bearing manufacturers. This Zacks Rank #1 stock has an expected earnings growth rate of 4.8% for the current year compared with the industry average of 1.8%. Its earnings estimate for the current year has improved 0.6% over the last 30 days. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 10.99, lower than the industry average of 13.85. You can see the complete list of today’s Zacks #1 Rank stocks here.

Owens-Illinois, Inc. (OI - Free Report) is involved in production and selling of glass container products. This Zacks Rank #1 stock has an expected earnings growth rate of 15.9% for the current year. The P/E ratio for the current financial year (F1) is 7.35, lower than the industry average of 11.33.

Apogee Enterprises, Inc. (APOG - Free Report) is a leader in technologies involving the design and development of value-added glass products and services. This Zacks Rank #2 (Buy) stock has an expected earnings growth of 29.3% for the current year, compared with the industry average of 22.6%. Its earnings estimate for the current year has improved 1.4% over the last 30 days.

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