Of late, upswing in the U.S. industrial production has been dominating headlines, signaling robust growth in manufacturing activity. The 1.1% rise in industrial production in February has given a new reason to cheer the performance of the industrial products sector considering that it is a significant turnaround from January’s 0.3% decline. The rebound in construction and energy-related activities led to the largest growth in industrial production over the past four months.
Industrial Products Sector on a Comeback Trail
Over the past few years, the industrial products sector has been affected by various factors, including soft commodity prices, reduced investment in the energy sector, dismal economic conditions in some developed and developing nations, and the Brexit referendum. Notably, oil and gas prices fell to historic lows, which curbed the sector's growth. Further, the sector was marred by supply-chain management issues. However, the sector started to rebound in 2017 on the back of increased infrastructure spending and other growth-friendly policies of the new administration. Rise in manufacturing and mining activity also played a crucial role despite the impact of several hurricanes last year.
Driving Factors in 2018
Strong employment growth is anticipated to support the recovery in the industrial products sector. Solid wage growth and improving GDP are crafting a solid base for consumer spending. One more impetus is easy credit availability, which spurs a rich spending for residential housing and non-residential construction. Further, entry of smarter products and Internet of Things (IoT) fuels growth. Thus, rise in production activity, new orders and inventories remain key growth drivers. Further, the recent U.S. tax reform will drive the sector’s performance.
Upbeat Data Supports Buoyancy
Some fresh statistics released regarding manufacturing activities also instill optimism in the market. The latest report of the Institute for Supply Management (ISM) stated that the Purchasing Managers Index (PMI) was pegged at 60.8% in February, up 1.7% from January.
In addition, the national factory activity index reading of 60.8 in February rose from 59.1 in January. A reading above 50 indicates expansion in the manufacturing sector.
Also, the U.S Architecture Billings Index (ABI), an economic indicator that provides an approximately nine to 12 month glimpse into the future of non-residential construction spending activity, was 52 in February. Any score more than 50 indicates billings growth and reflects a healthy business environment.
According to the ADP National Employment Report, private companies created 235,000 jobs in February. The manufacturing industry created 14,000 jobs, while the construction industry created 21,000 jobs in the private sector.
Will the Rebound Continue?
The recent imposition of a tariff of 25% on steel and 10% on aluminum imports by Trump has affected the sector. Though these tariffs will be beneficial for American steel makers, they will inflate the manufacturing costs for consumers of the metals, including construction players, manufacturers of auto, aircrafts and machinery, as well as beverage producers.
As per reports, China is preparing to respond to the tariffs with tit-for-tat tariffs aimed at U.S. agricultural exports. This aggravates the troubles of farm-equipment makers, which have been battling sluggish domestic agricultural demand for the past few years.
On a different note, per the latest announcement, the Fed has hiked interest rates by a quarter point on Wednesday, marking the first rate hike of 2018. The Federal Open Market Committee (FOMC) increased the overnight funds rate to 1.5-1.75%, signaling confidence in the strengthening economy.
This sector has also been performed in line with the S&P 500 market in recent times. Over the past year, the sector has gained around 15.8%, compared to the S&P 500 index’s growth of 15.7%.
Zacks Sector Rank
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). Over 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 #1, remains in the top half.
We believe investors will benefit by picking industrial stocks with great momentum as momentum investing is one of the most successful strategies to churn out profits from volatile markets.
How to Make the Right Choice?
A top Momentum Score cuts short the screening process as it takes into account several factors, including volume change and performance, relative to its peers. It indicates when the timing is best to grab a stock and take advantage of its momentum with the highest probability of success. Stocks with a Momentum Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), handily outperform other stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.
For investors seeking to apply this strategy to their portfolio, we have chosen five industrial stocks that outperformed the sector’s performance over the past year.
Hitachi Construction Machinery Co., Ltd. engages in the manufacture, sale, service and rental of construction and industrial machinery. It operates through the Construction and Mining product segments. It sports a Zacks Rank #1 and has a Momentum Score of A. The stock has appreciated 52.7%, surpassing the sector’s gain of 15.8% in the past year.
China National Materials Group Corp. , an investment holding company, primarily engages in the production and sale of cement through six business segments. The stock flaunts a Zacks Rank #1 and has a Momentum Score of B. Its shares have soared 179%, outperforming the sector’s gain of 15.8% over the past year.
Harsco Corporation (HSC - Free Report) , a services and engineered products company, also sports a Zacks Rank #1 and has a Momentum Score of B. The stock has surged 89.6% in the past year, ahead of the sector’s growth.
Tenaris S.A. (TS - Free Report) is a leading manufacturer and supplier of seamless steel pipe products and associated services to the oil and gas, energy. The stock flaunts a Zacks Rank #1 and has a Momentum Score of B. The company’s shares have gained 16.2% in the past year, ahead of the sector’s growth.
Encore Wire Corporation (WIRE - Free Report) is a low-cost manufacturer of copper electrical building wire and cable. It flaunts a Zacks Rank #1 and has a Momentum Score of B. The stock has rallied 29%, surpassing the sector’s gain in a year’s time.
Zacks Editor-in-Chief Goes "All In" on This Stock
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