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ISM Manufacturing Index Hits 14-Year High: 5 Picks

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The most-prominent U.S. manufacturing index hit its highest level since May 2004 in August. This is a clear signal that both manufacturing and the overall economy are in great shape in the third quarter. The extent of the increase was unexpected and the jump in its employment component suggests that Friday could witness strong payroll gains from manufacturers.

The only cloud obscuring economic conditions at present is the ever-present specter of trade tensions. The dip in exports and imports indicate that manufacturers have begun to feel the heat from protectionist measures. But business and consumers have largely ignored these tensions up to now. This means that it’s still a good time to add manufacturing stocks to your portfolio.

Index Highest Since May 2004

The ISM manufacturing index increased from July’s 58.1% by 3.2% to hit 61.3% in August, a 14-year high. This is significantly higher than the estimated level of 57.7%. The new orders index increased by 4.9% from July’s level of 60.2% to hit 65.1%. The production index increased from 58.5% by 4.8% to touch 63.3%.

Additionally, the metric for employment increased by 2% to hit a six-month high of 58.5%. This is a clear indication that Friday’s nonfarm payroll numbers could witness strong payroll gains from manufacturers. The supplier deliveries index increased from 62.1% to hit 64.5%, nearly the highest level since 2004.

Could Trade Tensions Impede Gains?

Of the 18 industries covered by the survey, 16 expanded during the month of August. Among the few industries to undergo contraction was primary metals. This group includes steel and aluminum producers. With U.S. tariffs and retaliatory duties coming into play, procuring crucial metals at steady prices has become increasingly difficult.

The impact of Trump’s protectionist policies can also be gauged from the decline in the exports and imports indexes. The new export orders index declined from 55.3% in July by 0.1% to 55.2% in August, which represents a 10-month low. The imports index decreased from 54.7% by 0.8% to 53.9%, the lowest level since last September.

This means that at this point the only factor threatening the growth of manufacturing and wider economic expansion is trade tensions. Negotiations with Canada on NAFTA have remained inconclusive to date. Trump is also widely expected to impose another $200 billion of tariffs on China this week.

Our Choices

Fresh data from the Institute for Supply Management reveals that the economy has now expanded for the 112th consecutive month. The sudden jump in the ISM manufacturing gauge also indicates that the sector is in fine fettle. The only factor threatening this run of gains is trade tensions.

However, investors have ignored this factor up to now, choosing to focus on broader fundamentals. This is why it makes sense to pick select manufacturing stocks at this time. However, choosing winning stocks may be difficult.

This is where our VGM Score comes in. 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 our search to the following stocks based on a good Zacks Rank and a VGM Score of A.

Atkore International Group Inc. (ATKR - Free Report) manufactures and distributes electrical raceway products.

Atkore International sports a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 49.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 10.4% over the last 30 days.

Global Brass and Copper Holdings, Inc. (BRSS - Free Report) is a converter, fabricator, distributor and processor of copper and brass products primarily in North America.

Global Brass and Copper Holdings has expected earnings growth of 11.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.1% over the last 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Caterpillar has a Zacks Rank #2 (Buy). The company’s expected earnings growth for the current year is 67.7%. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 30 days.

Altra Industrial Motion Corporation (AIMC - Free Report) is one of the leading manufacturers and distributors of a diversified range of mechanical power transmission, or MPT components.

Altra Industrial Motion carries a Zacks Rank #2. The company has expected earnings growth of 23.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 2% over the last 60 days.

Alamo Group Inc. (ALG - Free Report) is a leader in the design, manufacture, distribution and service of high quality equipment for infrastructure maintenance, agriculture and other applications.

Alamo Group carries a Zacks Rank #2. The company has expected earnings growth of 28.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.9% over the last 30 days.

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