The U.S. manufacturing industry is facing severe challenges in 2019 owing to the lingering trade conflict and tariff war with China. Trade-related jitters have also resulted in a global manufacturing downturn. The U.S. economy has lost pace although it is growing for the 11th year on the trot. In spite of these negatives, a few manufacturing stocks popped in the past six months and still have upside left.
Tarde War Hurts Business Spending
A prolonged trade conflict with China has resulted in a tariff war wherein duties have been levied on hundreds of billion dollars on each other’s goods. The U.S. government has already levied 25% tariff on more than $300 billion of Chinese goods mostly used as cheap inputs for the technology and industrial sectors. On the other hand, China imposed tariffs on more than $100 billion U.S. products mainly from the agricultural sector.
Imposition of tariff on China-made, low-cost intermediary products raised the input cost of U.S. manufacturers. Consequently, U.S. business spending dropped significantly in 2019. The Institute of Supply Management reported that U.S. manufacturing activities contracted for four consecutive months from August to November.
Is Slowdown in Business Spending Bottoming Out?
On Nov 27, the Department of Commerce reported that new orders for manufactured durable goods increased $1.5 billion or 0.6% to $248.7 billion in October. More important information from the report was that the core durable goods order (which excludes defense aircraft) jumped 1.2% in October.
The core durable goods data for October indicate that business spending is likely to continue although the pace may decline considerably. Therefore, stabilization of business investment in October will act as a relief to the manufacturing sector. Additionally, new orders for core capital goods is a leading metric to calculate equipment spending in the U.S. government’s GDP measurement. Notably, manufacturing activities constituted nearly 12% of U.S. GDP.
Uncertainty Over Partial Trade Deal
The phase-one deal between the United States and China needs to be signed by Dec 15, after which the U.S. government is scheduled to impose a new round of tariffs on $160 billion of Chinese goods. The Trump administration can also raise the tariff rate on $250 billion of Chinese goods already under the U.S. tariff system.
On Nov 29, Reuters reported that the U.S. government may exercise its power to stop more foreign shipments of products with U.S. technology to China’s telecom behemoth Huawei Technologies. Further, on Dec 10, The Wall Street Journal reported that the U.S. Congress is considering introducing a new bill aiming to restrict the use of government funds to purchase Chinese busses and railcars.
However, on Dec 10, Bloomberg reported that Chinese authority is expecting President Trump to postpone fresh tariffs on the Asian economic giant in order to provide more time so that both sides can reach to an interim deal to resolve trade-related disputes. However, no confirmation has been given by White House.
Our Top Picks
At this stage, we have narrowed down our search to five manufacturing stocks that popped in the past six months and still have momentum for the next year. Each of our picks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks in the past six months.
Ultra Clean Holdings Inc. (UCTT - Free Report) designs, develops, prototypes, engineers, manufactures, and tests production tools, modules and subsystems for the semiconductor and display capital equipment industries primarily in North America, Asia, and Europe. The company has an expected earnings growth rate of 47.4% for next year. The Zacks Consensus Estimate for next year improved 28.4% over the last 60 days. The stock has jumped 79.4% in the past six months.
Plexus Corp. (PLXS - Free Report) provides electronic manufacturing services in the Americas, Europe, the Middle East, Africa, and the Asia-Pacific. It offers design and development, supply chain, new product introduction, and manufacturing solutions, as well as aftermarket services. The company has an expected earnings growth rate of 12.2% for 2020. The Zacks Consensus Estimate for next year improved 0.7% over the last 60 days. The stock has soared 45.1% in the past six months.
Tennant Co. (TNC - Free Report) is a world leader in designing, manufacturing and marketing solutions that empower customers to achieve quality cleaning performance, significantly reduce their environmental impact and help create a cleaner, safer, healthier world. The company has an expected earnings growth rate of 1% for next year. The Zacks Consensus Estimate for the 2020 improved 4.4% over the last 60 days. The stock has soared 30.6% in the past six months.
Cohu Inc. (COHU - Free Report) is a leading supplier of semiconductor test and inspection handlers, micro-electro mechanical system test modules, test contactors and thermal sub-systems used by global semiconductor manufacturers and test subcontractors. It operates through two segments, Semiconductor Test and Inspection Equipment, and PCB Test Equipment. The company has an expected earnings growth rate of 681% for next year. The Zacks Consensus Estimate for next year improved 5.8% over the last 60 days. The stock has surged 17.6% in the past six months.
Kaman Corp. (KAMN - Free Report) operates in the aerospace and industrial distribution markets. It operates through two segments, Distribution and Aerospace. The company has an expected earnings growth rate of 46.3% for next year. The Zacks Consensus Estimate for 2020 improved 24.1% over the last 60 days. The stock has surged 10.2% in the past six months.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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