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Manufacturing Output Rises for Fifth Straight Month: 5 Picks

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In October, manufacturing output increased for the fifth consecutive month, per data from the Federal Reserve. Last month’s gains came despite a decline in vehicle production, offsetting the fall in utilities and mining output. This led to the headline industrial production number gaining over October.

At this point, robust domestic economic expansion is helping to boost the fortunes of the manufacturing sector. However, rising raw materials costs, labor shortfall and capacity constraints are threats to the sector’s momentum.

Fortunately, manufacturers have turned to new strategies such as nearshoring and reshoring to battle such challenges. This is why it still makes sense to bet on select stocks from the sector at this stage.

Manufacturing Gains Offset Declines in Autos, Utilities, Mining

Industrial production increased by 0.1% in October, primarily because the increase in manufacturing output offset declines across several categories. Manufacturing output increased 0.3% last month, outweighing the decline in mining and utilities. The indexes for these sectors declined 0.3% and 0.5%, respectively.

Additionally, the increase in manufacturing came despite a drastic fall in production of motor vehicles. Production of automobiles declined 2.8% after gaining 1.3% in September. However, manufacturing still increased 0.5% after excluding the impact of motor vehicles and parts. This metric had gained 0.2% in September.

The primary catalyst for these gains was a solid increase of 0.8% in output of business equipment. Additionally, capacity utilization, which measures to the extent to which companies are utilizing their resources, increased from 76.1 to 76.2 in October, the highest level in more than three years.

Sector Still Faces Several Challenges

Despite the sector’s strong gains in October, manufacturing faces numerous challenges at this point. Labor shortages and capacity constraints make one set of concerns. But what has come to the forefront are the challenges produced by the Trump administration’s confrontational stance on trade issues.

This stance has led to an increase in tariffs on aluminum and steel as well as a variety of tariffs on Chinese goods. Retaliatory duties have also had a detrimental impact. While manufacturers are gaining from tax cuts and have resorted to improving processes and response time, several new strategies have also come into play.

From Nearshoring to Reshoring

The current trend for companies is to opt for nearshoring or even reshoring. Nearshoring takes into account political issues that manufacturing encounters on a regular basis. The idea behind this approach is to locate one’s supply chain in Mexico, Canada and other areas in North America. Of course, when an Asian location complies with local content rules and provides a cost advantage, such a move is no longer viable.

Reshoring goes the whole hog and actually relocates a nearshore or offshore operation back onshore. Contrary to popular view, this has no political advantage. Instead, local tax cuts, strong demand and a better environment make the relocation of a process logical for the same reason that it was nearshored or offshored.

Our Choices

The steady growth in manufacturing output clearly underlines the latent strength in factory activity. This is particularly true for October’s increase which has managed to negate the decline in mining and utilities output.

While, manufacturers continue to face a number of challenges, smarter processes and shorter response times are giving the sector a new edge. Strategies like nearshoring and reshoring are also coming into play. This is why it still makes sense to invest in manufacturing stocks. However, picking 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 down our search to the following stocks, each of which has a Zacks Rank #1 (Strong Buy) and a good VGM Score. You can see the complete list of today’s Zacks #1 Rank stocks here.

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

Atkore International has a VGM Score of A. The company has expected earnings growth of 6.8% for the current year.

EnPro Industries, Inc. (NPO - Free Report) is a diversified manufacturer of proprietary engineered products used in critical applications.

EnPro Industries has a VGM Score of A. The company has expected earnings growth of 62.8% for the current year. The Zacks Consensus Estimate for the current year has improved 6% over the last 30 days.

DXP Enterprises, Inc. (DXPE - Free Report) is a leading products and service distributor that adds value and total cost savings solutions to industrial customers.

DXP Enterprises has a VGM Score of B. The company has expected earnings growth of 97.7% for the current year. The Zacks Consensus Estimate for the current year has improved 13.3% over the last 30 days.

Harsco Corporation (HSC - Free Report) is a services and engineered products’ company.

Harsco has a VGM Score of B. The company has expected earnings growth of 70.3% for the current year. The Zacks Consensus Estimate for the current year has improved 2.4% over the last 30 days.

Ennis, Inc. (EBF - Free Report) is a designer, manufacturer and seller of business products and business forms.

Ennis has a VGM Score of B. The company has expected earnings growth of 8.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 12% over the last 60 days.  

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