Investors are constantly striving to determine which industry or sector holds the most potential for capital gains. After a harrowing last year, the industrial sector seems to be back in favor this year amid a global growth backdrop. It was one of the most adversely impacted sectors last year stemming from weak commodity prices, reduced investment in the energy sector due to lower oil prices, poor economic conditions in some developed and developing nations, and Brexit.
The scenario has improved with few indicators pointing toward healthy operating conditions in the industry. Per the U.S. Census Bureau report, new orders for U.S.-manufactured machinery increased 6.4% in the first nine months of 2017 led by growth in orders for construction, mining, industrial, material handling and other machineries.
Industrial production, one of the leading economic indicators for the industrial stocks, rose 0.9% in October. Manufacturing increased 1.3% while mining output fell 1.3%, as Hurricane Nate caused a short-term decline in oil and gas drilling as well as extraction. Industrial activity rose in October as normal operations resumed after Hurricanes Harvey and Irma hit production in September and October. Further, industrial production has grown 2.9% in the past 12 months, which bodes well for machinery stocks.
Per the Institute for Supply Management (ISM), its index of national factory activity slipped to a reading of 58.7 in October from 60.8 in September. The reading in September was the highest since May 2004 riven by supply chain disruptions. Though the index has slipped in October, it continues to signal strengthening manufacturing conditions. Notably, a reading above 50 indicates increased factory activity. The manufacturing sector accounts for about 12% of the U.S. economy.
According to the second estimate, U.S. GDP expanded at 3.3% in the third quarter of 2017 — the fastest pace of growth in three years. Per a report by the Commerce Department, consumer spending advanced 2.3% in 3Q17. Unemployment in the United States is currently at a 17-year low. In October, the United States created 261,000 jobs in October while the unemployment rate declined from 4.2% to 4.1.
Solid Sector Positioning, Projections
Machinery stocks are broadly grouped under Industrial Products, one of the 16 broad Zacks sectors. Year to date, the industrial products sector (one of the 16 broad Zacks sectors) has clocked a gain of 20.1%, outperforming the S&P 500’s climb of 16.9%.
The Industrial Products sector put up an impressive 19.6% growth in earnings in third-quarter 2017. Per our latest Earnings Trends report, earnings growth of 21.3% is projected for fourth-quarter 2017. It is one the four sectors that is expected to log double-digit growth in earnings in the fourth quarter.
We put our Sectors (all 16 of them) into two groups: the top half (i.e., sectors with the best average Zacks Rank) and the bottom half (the sectors with the worst average Zacks Rank). In the last 10 years, using a one week rebalance, the top half beat the bottom half by more than twice as much. (To learn more visit: About Zacks Sector Rank). The industrial products sector, with a Zacks Sector Rank #5, remains in the top half.
What Factors Will Help Sustain Growth?
The continuous advancements in technologies applied in agriculture and mining industries keep demand strong for farming and mining machinery. Long-term demand for agricultural equipment will be buoyed by increased global demand for food.
Further, favorable trends resulting from a growing, more affluent and increasing population along with rising living standards and dietary improvements will provide ample opportunity for long-term growth. Healthy growth in demand for packaged foods and beverages across nations, especially in emerging countries, are significantly increasing the use of highly sophisticated food processing and packaging equipment.
Construction machinery demand will remain strong in the years to come aided by population growth, urbanization, increased energy consumption as well as an expanding middle class. Further, increasing demand for global infrastructure, such as roads, housing, airports, and energy will help sustain growth.
We believe that implementation of the Trump government’s growth policies, especially the proposed $1 trillion spending on infrastructure improvement, will be a boon for industrial machinery stocks.
Thus we suggest you to stay invested in the sector to reap the benefits of healthy prospects ahead. To zero in on stocks that are winning currently and have the potential to gain further, we have opted for one of the relatively new investment techniques, by betting on stocks near a 52-week high. The 52-week investment strategy relies on the new investment mantra, “buy high and sell higher.”
Why These Stocks Are Good Bets
Investing in stocks near their 52-week high is similar to following the momentum strategy, which is based on the premise that once a trend is established, it is likely to continue. The surge can be attributed to a broad set of factors including impressive sales, robust profitability and bullish earnings prospects. Major developments may also send stocks soaring.
Meanwhile, stocks that are trading near their 52-week highs carry the risk of declining rapidly as the market might consider them overvalued. But the positives seem to outweigh drawbacks.
Notably, momentum investors strongly believe in “the trend is your friend,” which means stocks that are growing will continue to grow. They make short-term choices among stocks that are scaling up and sell them at the first sign of a downtrend. The basic idea is that once a trend is recognized, it is likely to continue and the chances of a reversal are minimal.
Consequently, picking such stocks might help investors earn higher returns in the short term. However, this is only a speculative strategy and not meant for the faint hearted.
Stocks That Fit the Bill
Given their positive earnings revisions, we believe these four industrial stocks, all of which are near their 52-week highs, will continue moving north for now. The stocks carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) and have a Momentum Style Score of A or B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Deere & Company (DE - Free Report) manufactures and distributes agriculture and turf, along with construction and forestry equipment worldwide. The company has a Zacks Rank #1 and Momentum Score of A. The long-term expected earnings growth rate for Deere is 8%. It has outpaced the Zacks Consensus Estimate in the trailing four quarters, generating a positive average earnings surprise of 19.5%.
The estimate for fiscal 2017 climbed 14% in the past 30 days and moved north 21% for fiscal 2018. The stock has gained 45.0% so far this year, outscoring the industry’s 41.3% gain. It is trading near its 52-week high of $152.68.
Alamo Group Inc. designs, manufactures, and sells agricultural equipment and infrastructure maintenance equipment for governmental and industrial use worldwide. The stock has a Zacks Rank #2 and a Momentum Style Score of A. The company has delivered positive earnings surprises in three of the trailing four quarters, with an average beat of 6.12%.
Sentiments are in favor of the company, as evident from the positive earnings estimate revisions of 7% for 2017 and 12% for 2018 in the last 60 days. The stock has logged a year-to-date gain of 49.6% and is trading near its 52-week high of $152.68.
Luxfer Holdings PLC (LXFR - Free Report) designs, manufactures, and supplies high-performance materials, components, and high-pressure gas-containment devices for healthcare, environmental, protection, and specialty end-markets in Europe, North America, and internationally. The stock has a Zacks Rank #2 and a Momentum Style Score of A. The company has an average beat of 10.67% in the last four quarters.
The earnings estimates for the company for 2017 have moved up 3% in the last 30 days. Closing at $14.73 yesterday, the stock has gained 19.8% so far this year. The stock is near its 52-week high of $14.87.
Sonoco Products Company (SON - Free Report) manufactures and sells industrial and consumer packaging products in North and South America, Europe, Australia, and Asia. The stock carries a Zacks Rank #2 and has a Momentum Style Score of B. The company has a long-term expected earnings growth rate of 4.67%. Both the earnings estimates for the company for 2017 and 2018 have moved up 2%, in the last 60 days. The stock gained 3.8% so far this year and is near its 52-week high of $55.07.
These stocks have growth potential as evident from their estimate revisions and price appreciation. We anticipate these stocks to yield strong returns in the short term and scale higher by this year end.
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