A key yardstick of manufacturing activity in the United States scaled a 13-year high in September, thanks to two major hurricanes. Increased demand for rebuilding supplies somewhat drove manufacturing activity.
The improvement was largely driven by strength in new orders, while other survey components including measures of production, export orders and employment grew at a faster clip in September. Banking on such bullish trends, investing in stocks from the manufacturing sector might prove lucrative now.
Factory Activity Surged in September
According to the Institute of Supply Management (ISM), the manufacturing index climbed to 60.8% in September from 58.8% in August, scaling the highest since May 2004. Notably, 17 of the 18 industries reported growth last month, led by textile mills and machinery. Only one industry, furniture manufacturing, witnessed a decline.
Nevertheless, such an unusually high number of industries reporting expansion reflected underlying economic strength that’s been developing over the last eight years. The economy, in fact, expanded 3.1% in the second quarter due to an uptick in consumer spending on strength in the labor market.
Any reading above 50 indicates increased factory activity, which accounts for 12% of the U.S. economy. The ISM survey, in fact, showed that the manufacturing index has remained above the desired level for the last 13 months. Here’s a look at how the index fared this year:
|Month||Index Reading (%)|
Average for 2017 - 57.1
High - 60.8
Low - 54.8
(Source: Institute for Supply Management)
Inside the Report
New orders, production, new export orders and hiring increased last month. The index of new orders jumped 4.3 points to 64.6%. Orders are also expected to remain strong in the coming months as inventory level remained at a six-year low.
Timothy R. Fiore, Chair of the ISM, added that “order input continues at a strong pace averaging 61.6 percent since December 2016 setting the pace for production activity.” The nation’s production has been strong, courtesy of higher global demand and U.S. capital outlays. The production index increased 1.2 points to 62.2%.
The ISM survey also showed a pickup in its measure of exports since producers benefitted from a weaker dollar this year, which made U.S. products less expensive in foreign markets. Meanwhile, the ISM’s order backlogs index surged to its highest level since April 2011, which explains why more manufacturing hubs are stepping up hiring. The ISM survey indicated that a measure of employment rose to 60.3%, its strongest reading since 2011.
What Lifted Manufacturing Activity?
U.S. factory activity hit record highs last month after hurricanes Harvey and Irma disrupted supplies but drove demand for manufactured goods. Harvey, the first major hurricane to hit the U.S. mainland in almost 12 years, had put vast areas under water. The onslaught of the torrential rainfall followed the storm, which originated in the Gulf of Mexico. The rainstorm originated from a tropical depression which rapidly ballooned from a Category 1 hurricane to Category 4. Harvey had forced the shutdown of Houston-area refineries and chemical plants, while several car dealerships and merchandise were destroyed.
While Houston, Texas and other parts of the Gulf reeled under the effects of Harvey, Irma hit the Sun Shine state of Florida. Irma is the most powerful Atlantic hurricane on record, which has caused widespread devastation in Florida as well as the French Caribbean island territories.
5 Top Manufacturing Stocks to Buy Now
The latest reading of the ISM survey reinforces the view that manufacturing activities are growing at a rapid pace and are likely to expand in the days ahead. Hence, picking manufacturing stocks seems to be a smart option at this moment. We have, thus, selected five stocks that sport a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Such stocks also boost a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Twin Disc, Incorporated (TWIN - Free Report) designs, manufactures and sells marine and heavy duty off-highway power transmission equipment. The company, which is part of the Zacks Manufacturing - General Industrial industry, has a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 1% over the last 90 days. The company’s expected growth rate for the current and next quarters are 100% and 80.9%, respectively.
Lincoln Electric Holdings, Inc. (LECO - Free Report) is a manufacturer of welding, cutting and brazing products. The company, which is part of the Zacks Manufacturing - Tools & Related Products industry, has a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased 2.2% over the last 90 days. The company’s expected growth rate for the current and next quarters are 4.4% and 18.1%, respectively.
H&E Equipment Services, Inc. (HEES - Free Report) is an integrated equipment services company. The company is focused on heavy construction and industrial equipment. H&E Equipment Services, which is part of the Zacks Manufacturing - Construction and Mining industry, has a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 9.5% over the last 90 days. The company’s expected growth rate for the current quarter and year are 21.2% and 6.7%, respectively.
Stanley Black & Decker, Inc. (SWK - Free Report) is a global provider of hand tools, power tools and related accessories, and products and services for various industrial applications. The company, which is part of the Zacks Manufacturing - Tools & Related Products industry, has a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings increased almost 1% over the last 90 days. The company’s expected growth rate for the current and next quarters are 10.9% and 23.6%, respectively.
UFP Technologies, Inc. (UFPT - Free Report) is a designer and custom converter of foams, plastics, composites and natural fiber materials. The company, which is part of the Zacks Containers - Paper and Packaging industry, has a VGM Score of A. The Zacks Consensus Estimate for its current-year earnings increased 1.4% over the last 90 days. The company’s expected growth rate for the current and next quarters are 63.6% and 95%, respectively.
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