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US Durable Goods Order Remains Strong in August: 5 Picks

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On Sep 27, the Department of Commerce reported that the U.S. durable goods orders for the month of August rebounded following a stiff decline in July. The increase marked its second gain in the past three months.

This indicates that the U.S. manufacturing sector, which constitutes around 12% of the country’s GDP, is increasing capital spending driven by massive tax overhaul, deregulatory measures, and strong domestic and global demand.

Against this backdrop, it will be prudent to invest in stocks that are poised to gain from the solid factory orders data with a favorable Zacks Rank.

Robust Factory Orders in August

U.S. factory orders rose 4.5% in August, buoyed by strong demand for nondefense aircraft and parts, transportation equipment and metal products. This was in contrast to a revised decline of 1.2% in July. New orders for U.S. manufactured goods in August increased $11.1 billion to $259.6 billion. Meanwhile, shipments of manufactured goods increased 0.8% ($1.9 billion) to $253.1 billion.

On Sep 4, the ISM reported that its manufacturing index for the month of August had come in at 61.3, its highest since May 2004. Any reading over 50% indicates that the relevant sector is expanding. This sector had added 350,000 jobs since President Donald Trump took office in January 2017.

Immediate Concerns

The U.S. manufacturing sector is currently plagued with three concerns. First, tariffs imposed on several industrial intermediary products have raised input costs. Moreover, ongoing trade related conflict between the United States and China is deteriorating with each passing day. As a result of trade conflicts, U.S. exports have become susceptible to retaliatory tariffs.

Second, the U.S. labor market is at its sturdiest since recession. Unemployment rate remains at 3.9%, its 18-year low. Moreover, in August, wages grew 2.9% on an annualized basis, reflecting its highest level since June 2009. Hike in wage rate will raise the cost of production.  

Third, the Fed has recently increased the benchmark interest rate from 2% to 2.25%. This was the third rate hike this year and one more is likely before the end of 2018. Higher interest rate will raise cost of funds for manufacturers.

Future Looks Bright Despite Concerns   

Tax-reforms and deregulation policies of the Trump administration are likely to act as major catalysts.  The corporate tax rate was lowered from 35% to 21%. President Trump has also promised to remove 75% of the regulations during his tenure. President Trump’s business-friendly policies ought to help the private employers.

Moreover, the government has taken a decision to spend a whopping $1.5 trillion on several infrastructure projects like constructing new roads, bridges, highways, railways and waterways across the country over a period of 10 years. This project will generate significant demand for manufacturing activity.

Our Top Picks

Solid macro-economic fundamentals, government’s tax reform and deregulation proposals along with sustained strong earnings performance are major tailwinds for the U.S. economy. At this stage, investment in stocks likely to gain from the robust state of manufacturing will be a lucrative option. We narrowed down our search to five stocks with Zacks Rank #1 (Strong Buy) or 2 (Buy) and strong growth potential.

The chart depicts price performance of our five picks in the last three months.

Aerojet Rocketdyne Holdings Inc. (AJRD - Free Report) designs, develops, manufactures, and sells aerospace and defense products and systems in the United States. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. The company has expected earnings growth of 71.6% for current year. The Zacks Consensus Estimate for the current year has improved by 24.5% over the last 60 days.

Alcoa Corp. (AA - Free Report) is a global industry leader in bauxite, alumina and aluminum products. It flaunts a Zacks Rank #1. The company has expected earnings growth of 40.2% for current year. The Zacks Consensus Estimate for the current year has improved by 4.5% over the last 60 days.

Trinity Industries Inc. (TRN - Free Report) provides various products and services to the energy, chemical, agriculture, transportation, and construction sectors in the United States and internationally. It carries a Zacks Rank #2. The company has expected earnings growth of 6.6% for current year. The Zacks Consensus Estimate for the current year has improved by 3.8% over the last 60 days.

Westinghouse Air Brake Technologies Corp. (WAB - Free Report) is one of North America's largest providers of value-added, technology-based products and services for freight rail. It carries a Zacks Rank #2. The company has expected earnings growth of 13.4% for current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 60 days.

Park-Ohio Holdings Corp. (PKOH - Free Report) operates through two segments, Manufactured Products and Logistics, which serve a wide variety of industrial markets. It has a Zacks Rank #2. The company has expected earnings growth of 20.4% for current year. The Zacks Consensus Estimate for the current year has improved by 4.6% over the last 60 days.

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