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Industrial Output Slows Down in July: 4 Solid ETFs & Stocks
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After climbing 1% in June, growth in American productivity slowed down last month after being hit by Trump’s tariff threats. Industrial production (a measure of output at factories, mines and utilities) inched up 0.1% in July as weakness in the mining and utilities sectors offset most of the growth in manufacturing output.
Inside the Numbers
Manufacturing output grew 0.3% in July driven by higher production of cars, electronics, and appliances. Meanwhile, utilities output fell 0.5% and mining output dipped 0.3% after five consecutive months of growth. Industrial capacity utilization remained flat at 78.1% in July.
The manufacturing sector, which accounts for about 75% of the U.S. industrial production, has been gaining momentum since the start of 2017 on rising energy prices and historic tax cuts. The modest gain in July indicates tough time for manufacturers, who are struggling with a strong dollar, plateauing housing sector and rising trade tensions. Notably, a strengthening dollar is making U.S. products more expensive abroad and is likely to weigh on the growth of factories in the coming months as well (read: Global Manufacturing in a Tight Spot: ETFs to Watch).
Additionally, the shortage of workers could also pose a risk to production and the tit-for-tat tariff threats suggest some crunch in the supply chain. Trump’s tariffs on imported steel and aluminum are raising costs for many manufacturers, taking a toll on the outlook for the industrial sector. The International Monetary Fund warned that retaliatory tariff threats will derail global economic recovery, leading to a slowdown in exports and business spending.
Solid Outlook
Though industrial production fell short of analyst expectations, it is still up 4.2% from the year-ago month. Mining increased 12.9% year over year, underscoring the persistent strength in the economy. Further, the headwinds are outweighed by the strong earnings optimism and accelerating economic growth.
U.S. GDP growth expanded 4.1% annually in the second quarter, representing the fastest pace of growth in nearly four years. The number is almost double the revised Q1 growth rate of 2.2%. The economy is on track to hit the 3% annual growth, thanks to historic tax cuts, infrastructure investment, higher government spending, deregulation, rising wages and record unemployment. Trump also said, “We're on track to hit the highest annual growth rate in over 13 years."
With the second-quarter earnings season winding down, the industrial sector is the fifth largest contributor to S&P 500 earnings growth among the 16 Zacks sectors. Earnings of the industrial sector reported so far are up 35.7% on 10.2% revenue growth. Moreover, Industrials has a strong sector Rank (top 44%) (read: Bevy of Industrial Earnings Puts These ETFs in Focus).
Adding to the optimistic outlook, the United States and China are expected to hold the next round of trade talks later in the month that could bring some relief to the industrial sector.
Given the trade risk, investors may want to consider staying on the sidelines for the time being. However, risk tolerant long-term investors may consider the dip a buying opportunity, should they have the patience for extreme volatility. For them, we have highlighted some of the beaten down ETFs & stocks that look attractive at present given that these have solid Zacks ETF Rank #1 (Strong Buy) or #2 (Buy). For stocks also, we have screened for VGM Score of A or B:
First Trust RBA American Industrial Renaissance ETF (AIRR - Free Report)
This ETF offers exposure to small and mid-cap securities in the industrial and community banking sectors by tracking the Richard Bernstein Advisors American Industrial Renaissance Index. Holding 55 stocks in its basket, the fund is well spread across components with none accounting more than 3.92% share. The product has $185.6 million in AUM and trades in lower volume of around 22,000 shares per day on average. It charges 70 bps in annual fees and has a Zacks ETF Rank #2 (read: 4 ETFs in Focus Post July Jobs Data).
This is the most popular ETF in the space with AUM of $12.5 billion and an average daily volume of nearly 12.8 million shares. The fund follows the Industrial Select Sector Index, holding 70 stocks in its basket with relatively higher concentration on the top firm – Boeing (BA). About 27.6% of the assets is allocated to aerospace & defense while industrial conglomerates, machinery, and road & rail make up for a double-digit share each. This ETF charges 13 bps in fees per year and has a Zacks ETF Rank #2.
This fund tracks the MSCI USA IMI Industrials Index, holding 345 stocks in its basket with none accounting for more than 6.4% share. Aerospace & defense makes up for the top sector with one-fourth of the portfolio, followed by machinery (18.6%) and industrial conglomerates (13%). The product has amassed $489.8 million in its asset base while trading in good volumes of around 134,000 shares a day on average. It charges 8 bps in annual fees from investors and has a Zacks ETF Rank #2.
This fund follows the MSCI US IMI Industrials 25/50 Index and holds about 351 securities in its basket with none accounting for more than 6.4% of the assets. From an industrial look, aerospace and defense takes the top spot at 23.6% followed by industrial conglomerates at 13.1%. The fund manages $3.8 billion in its asset base and charges 10 bps in annual fees. Volume is moderate as the product exchanges 124,000 shares a day on average. VIS has a Zacks ETF Rank #2 (see: all the Industrial ETFs here).
The company is a global manufacturer of lifting and material processing products and services, delivering lifecycle solutions to maximize customer return on investment. Earnings estimates were revised upward by a couple of cents for this year in the last 30 days. The stock has an estimated earnings growth rate of 114.81%. Terex currently carries a Zacks Rank #2 and has a VGM Score of A.
Altra Industrial Motion Corp.
It is a designer, producer and marketer of electromechanical power transmission products. The stock saw positive earnings estimate revision of seven cents for this year in the last 30 days and has an estimated growth rate of 23.90%. It has Zacks Rank #1 and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
This is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Caterpillar saw solid earnings estimate revision of 79 cents for this year in the last 30 days with an estimated growth rate of 67.73%. It sports a Zacks Rank #1 and a VGM Score of A (read: Time to Buy Industrial ETFs on Value?).
This is a global leader in pressure-sensitive label and functional materials and labeling solutions for apparel. It saw its earnings estimate rise nine cents for this year in the last 30 days and has an expected growth rate of 21.60%. Avery Dennison carries a Zacks Rank #2 and has a VGM Score of A.
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Industrial Output Slows Down in July: 4 Solid ETFs & Stocks
After climbing 1% in June, growth in American productivity slowed down last month after being hit by Trump’s tariff threats. Industrial production (a measure of output at factories, mines and utilities) inched up 0.1% in July as weakness in the mining and utilities sectors offset most of the growth in manufacturing output.
Inside the Numbers
Manufacturing output grew 0.3% in July driven by higher production of cars, electronics, and appliances. Meanwhile, utilities output fell 0.5% and mining output dipped 0.3% after five consecutive months of growth. Industrial capacity utilization remained flat at 78.1% in July.
The manufacturing sector, which accounts for about 75% of the U.S. industrial production, has been gaining momentum since the start of 2017 on rising energy prices and historic tax cuts. The modest gain in July indicates tough time for manufacturers, who are struggling with a strong dollar, plateauing housing sector and rising trade tensions. Notably, a strengthening dollar is making U.S. products more expensive abroad and is likely to weigh on the growth of factories in the coming months as well (read: Global Manufacturing in a Tight Spot: ETFs to Watch).
Additionally, the shortage of workers could also pose a risk to production and the tit-for-tat tariff threats suggest some crunch in the supply chain. Trump’s tariffs on imported steel and aluminum are raising costs for many manufacturers, taking a toll on the outlook for the industrial sector. The International Monetary Fund warned that retaliatory tariff threats will derail global economic recovery, leading to a slowdown in exports and business spending.
Solid Outlook
Though industrial production fell short of analyst expectations, it is still up 4.2% from the year-ago month. Mining increased 12.9% year over year, underscoring the persistent strength in the economy. Further, the headwinds are outweighed by the strong earnings optimism and accelerating economic growth.
U.S. GDP growth expanded 4.1% annually in the second quarter, representing the fastest pace of growth in nearly four years. The number is almost double the revised Q1 growth rate of 2.2%. The economy is on track to hit the 3% annual growth, thanks to historic tax cuts, infrastructure investment, higher government spending, deregulation, rising wages and record unemployment. Trump also said, “We're on track to hit the highest annual growth rate in over 13 years."
With the second-quarter earnings season winding down, the industrial sector is the fifth largest contributor to S&P 500 earnings growth among the 16 Zacks sectors. Earnings of the industrial sector reported so far are up 35.7% on 10.2% revenue growth. Moreover, Industrials has a strong sector Rank (top 44%) (read: Bevy of Industrial Earnings Puts These ETFs in Focus).
Adding to the optimistic outlook, the United States and China are expected to hold the next round of trade talks later in the month that could bring some relief to the industrial sector.
Given the trade risk, investors may want to consider staying on the sidelines for the time being. However, risk tolerant long-term investors may consider the dip a buying opportunity, should they have the patience for extreme volatility. For them, we have highlighted some of the beaten down ETFs & stocks that look attractive at present given that these have solid Zacks ETF Rank #1 (Strong Buy) or #2 (Buy). For stocks also, we have screened for VGM Score of A or B:
First Trust RBA American Industrial Renaissance ETF (AIRR - Free Report)
This ETF offers exposure to small and mid-cap securities in the industrial and community banking sectors by tracking the Richard Bernstein Advisors American Industrial Renaissance Index. Holding 55 stocks in its basket, the fund is well spread across components with none accounting more than 3.92% share. The product has $185.6 million in AUM and trades in lower volume of around 22,000 shares per day on average. It charges 70 bps in annual fees and has a Zacks ETF Rank #2 (read: 4 ETFs in Focus Post July Jobs Data).
Industrial Select Sector SPDR (XLI - Free Report)
This is the most popular ETF in the space with AUM of $12.5 billion and an average daily volume of nearly 12.8 million shares. The fund follows the Industrial Select Sector Index, holding 70 stocks in its basket with relatively higher concentration on the top firm – Boeing (BA). About 27.6% of the assets is allocated to aerospace & defense while industrial conglomerates, machinery, and road & rail make up for a double-digit share each. This ETF charges 13 bps in fees per year and has a Zacks ETF Rank #2.
Fidelity MSCI Industrials Index ETF (FIDU - Free Report)
This fund tracks the MSCI USA IMI Industrials Index, holding 345 stocks in its basket with none accounting for more than 6.4% share. Aerospace & defense makes up for the top sector with one-fourth of the portfolio, followed by machinery (18.6%) and industrial conglomerates (13%). The product has amassed $489.8 million in its asset base while trading in good volumes of around 134,000 shares a day on average. It charges 8 bps in annual fees from investors and has a Zacks ETF Rank #2.
Vanguard Industrials ETF (VIS - Free Report)
This fund follows the MSCI US IMI Industrials 25/50 Index and holds about 351 securities in its basket with none accounting for more than 6.4% of the assets. From an industrial look, aerospace and defense takes the top spot at 23.6% followed by industrial conglomerates at 13.1%. The fund manages $3.8 billion in its asset base and charges 10 bps in annual fees. Volume is moderate as the product exchanges 124,000 shares a day on average. VIS has a Zacks ETF Rank #2 (see: all the Industrial ETFs here).
Terex Corporation (TEX - Free Report)
The company is a global manufacturer of lifting and material processing products and services, delivering lifecycle solutions to maximize customer return on investment. Earnings estimates were revised upward by a couple of cents for this year in the last 30 days. The stock has an estimated earnings growth rate of 114.81%. Terex currently carries a Zacks Rank #2 and has a VGM Score of A.
Altra Industrial Motion Corp.
It is a designer, producer and marketer of electromechanical power transmission products. The stock saw positive earnings estimate revision of seven cents for this year in the last 30 days and has an estimated growth rate of 23.90%. It has Zacks Rank #1 and a VGM Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Caterpillar Inc. (CAT - Free Report)
This is a manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Caterpillar saw solid earnings estimate revision of 79 cents for this year in the last 30 days with an estimated growth rate of 67.73%. It sports a Zacks Rank #1 and a VGM Score of A (read: Time to Buy Industrial ETFs on Value?).
Avery Dennison Corporation (AVY - Free Report)
This is a global leader in pressure-sensitive label and functional materials and labeling solutions for apparel. It saw its earnings estimate rise nine cents for this year in the last 30 days and has an expected growth rate of 21.60%. Avery Dennison carries a Zacks Rank #2 and has a VGM Score of A.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>