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August witnessed the strongest manufacturing activity in more than six years, according to the latest report by the Institute for Supply Management (ISM). Such an upbeat reading comes at an opportune time when manufacturers have added a record number of jobs, both in the private and public sectors.

This boost in jobs, particularly in the manufacturing sector, is reflective of one of the Trump administration’s key campaign promises. In fact, Trump’s plan of comprehensive tax reform should help U.S. manufacturers create more jobs. With this in mind, adding stocks from the manufacturing sector could be a lucrative move for your portfolio

ISM Manufacturing Highest in 6 Years

The ISM Manufacturing Index by 2.5% to 58.8% in August, up from July's level of 56.3% and representing the highest level recorded since April 2011.

Out of the 18 manufacturing industries, 14 have registered growth. Investors should note that the five key indicators that are monitored by the ISM Manufacturing Index are new orders, production, employment, inventories and supplier deliveries. 

Although the index for new orders decreased 0.1% to 60.3%, the employment index jumped 4.7% to 59.9% — the highest in more than six years; the production index improved 0.4% to 61% as well.

The ramping up of manufacturing activity shows increased raw material purchase by managers to meet heightened demand.

Index Shows Growth in U.S. Economy

Data provided by the Institute for Supply Management clearly shows that the manufacturing index has been well above 50% over the past 12 months. As per the non-profit organization, if the index is more than 43.3% through a length of time, it hints at an expanding economy.

The U.S. economy grew at the fastest pace during the April-to-June quarter of 2017 in more than two years. During the second quarter, the market witnessed 3% improvement in gross domestic product (GDP) – revised upward from the first estimate of 2.6% – against only a 1.2% increment in the prior quarter. The improvement in the economy was mainly supported by strong business investments.

Further, favorable business spending and retail sales data have led most economists to predict that the U.S. economy will maintain a growth pace of more than 3% in the third quarter.

Manufacturing Jobs Created

According to the ADP National Employment Report, private companies created 237,000 jobs in August, marking the best pace since March. The broader manufacturing industry, which created 16,000 jobs, produced record employment in the private sector.

Additionally, the U.S. Bureau of Labor Statistics revealed that non-firm payroll for the month of August increased by 156,000. Manufacturing firms created 36,000 new jobs in the United States, the highest monthly job addition in five years.

Growth in manufacturing sector employment is in line with Trump’s electoral promises and immediate actions on assuming office. During his campaign, the president had promised to improve the manufacturing industry by creating jobs through a combination of higher infrastructure spending, tax cuts, and deregulation. And recently, President Trump asked members of Congress to pass a bill to slash business and personal tax rates in order to do just that.

Our Choices

The latest reading of the ISM manufacturing index reinforces the view that manufacturing activities are growing at a rapid pace and are likely to expand in the days ahead. Significant job creation by manufacturers, along with Trump’s promises and actions, are likely to support the trend.

Picking manufacturing stocks seems to be a smart option at this moment. However, picking winning stocks may be a daunting task.

This is where our VGM Score comes in handy. 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 solid Zacks Rank and VGM Score.

Headquartered in Peoria, IL, Caterpillar (CAT - Free Report) is the world’s leading manufacturer of construction and mining equipment, diesel, and natural gas engines and industrial gas turbines.

With a VGM Score of B, the company is likely to witness year-over-year earnings growth of 52.7% in 2017. Also, Caterpillar has surpassed the Zacks Consensus Estimate in each of the last four quarters with an average positive surprise of 41.4%.

Presently, the company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO (AGCO - Free Report) , headquartered in Duluth, GA, is a leading manufacturer and distributor of agricultural equipment and related replacement parts. 

The Zacks #1 Ranked company beat the Zacks Consensus Estimate in the last four quarters, at an average of 39.7%. AGCO, with a VGM Score of A, is expected to post year-over-year earnings growth of almost 23% in 2017.

Headquartered in Foothill Ranch, CA, Kaiser Aluminum (KALU - Free Report) is a manufacturer and distributer of semi-fabricated specialty aluminum mill products. 

The Zacks #1 Ranked company surpassed the Zacks Consensus Estimate in three of the past four quarters, with an average positive earnings surprise of 17.2%. Also, the firm – having a VGM Score of A – will likely see earnings growth of 12.9% in 2017.

Worthington Industries (WOR - Free Report) , headquartered in Columbus, OH, is a leading global metal manufacturing player. The firm posted an average positive earnings surprise of 4.1% over the last four quarters.

This #1 Ranked firm currently has a VGM Score of A. Also, for fiscal year ending May 31, 2018, we expect Worthington to post 5% year-over-year earnings growth.

Headquartered in Glendale, CA, Avery Dennison (AVY - Free Report) is a manufacturer and global distributer of pressure-sensitive adhesives.

The firm carries a Zacks Rank #2 (Buy) and a VGM Score of B. Avery Dennison managed to beat the Zacks Consensus Estimate in each of the last four quarters, with an average positive earnings surprise of 6.1%.

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