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4 Manufacturing Stocks to Bet on Despite Trade War Jitters

After witnessing a sharp rise on Dec 3, the stock markets plunged the next day as President Donald Trump’s tweets refueled trade war apprehensions. A flattening yield curve also spooked equity markets.
The much awaited dinner meeting between President Trump and his Chinese counterpart Xi Jinping on Dec 1 resulted in a cease-fire in the ongoing trade dispute between the world's two largest economies. Both the leaders agreed to a 90-day delay to make time for further negotiations. The United States agreed on refraining from imposing planned increase in tariffs from 10% to 25% on $200 billion which was supposed to come into effect from Jan 1, 2019 on Chinese goods exports. Per the truce, China will buy a substantial amount of U.S. agricultural, energy and industrial products. The two sides agreed to launch negotiations to reduce trade tensions further and discuss forced technology transfer, intellectual-property protection, non-tariff barriers, and cyber and agriculture issues, among other concerns over the next 90 days.
This development sent the dollar reeling and sparked a rally in global stock markets and commodities. Consequently, the Dow Jones Industrial Average was up 1.1% or 287.97 points on Dec 3, while the S&P 500 added 30.20 points or 1.1%. The Nasdaq Composite Index gained 1.5% or 110.98 points. Industrial companies like Caterpillar, Deere, Terex and AGCO also gained as these companies as these were relieved of higher raw material costs due to the imposition of tariffs.
Trump’s “Tariff Man” Tweets Trigger Fear
The euphoria seemed to be short lived, as President Trump’s tweets on Dec 4 resulted in market apprehension as to whether the truce will materialize or the relations will still remain vulnerable. Though Trump’s “fair deal” echoed optimism, the mention of him being the “Tariff man” and threats of “major tariffs” on Chinese imports if talks fail reignited trade war fears.
This triggered concerns whether the two sides will be able to find amicable resolution during the 90 day agreed period. The markets soon reacted to this with the Dow Jones Industrial Average plunging 799.36 points or 3.10%, S&P 500 index dipped 90.31 points or 3.24% and the Nasdaq Composite losing 283.09 points or 3.80%.
Industrial stocks like Caterpillar, Deere and Manitowoc, among others dipped 6.93%, 6.55% and 9.4%, respectively on Dec 4. However, all is not over for industrial stocks and it is too early to write off industrial stocks as the recent manufacturing data indicate improved performance in the sector.
Upbeat Manufacturing Data Instills Optimism
The manufacturing sector which accounts for about 12% of the U.S. economy is on a roll this year despite tariff concerns. Per the Institute for Supply Management (“ISM”) latest report, Purchasing Managers’ Index (“PMI”) for November rose 59.3% — exhibiting strong growth in manufacturing for the 27th consecutive month. The upbeat performance continues to be led by strong production output and continued strength in new orders, signaling strong economic momentum.
The PMI has averaged 59.2% over the last 12 months ranging from a low of 57.3% in April 2018 to a high of 61.3% in August 2018. Notably, a reading above 50% indicates expansion in manufacturing economy. The PMI reading of 59.3% for November corresponds to an increase of 4.9% in real gross domestic product (GDP) on an annualized basis.
New Orders Index registered 62.1% in September, indicating growth in new orders for the 35th consecutive month. Notably, the New Orders Index has remained at 60% or above for the 17th straight month. In spite of labor constraints throughout the supply chain and transportation difficulties, the Production Index registered growth of 60.6% in November, indicating improvement in production for the 27th consecutive month. Employment continued to expand, supporting production growth. The index was pegged at 58.4% in November, indicating growth for the 26th consecutive month.
In addition, industrial production — a measure of the level of output of manufacturing, mining and utilities sectors — rose 0.1% in November for its fifth consecutive monthly increase. The overall index is now reported to have advanced at an annual rate of 4.7% in the third quarter, above the gain of 3.3% reported earlier. Capacity utilization for the industrial sector climbed 78.4% in November, which is 1.4 percentage points lower than its long-run (1972–2017) average.
These above-mentioned strong data numbers is an indication that the sector is on a firm footing. Further, the fact that capacity utilization remains below its long-term average indicates that improvement can be expected from the metric. Ongoing momentum in new orders, strong housing and commercial construction markets, growth in job additions, positive consumer confidence, and recent tax reform bodes well for the sector. Moreover, the resolution of the hostilities will act as a major tailwind for manufacturing, which has been one of the biggest casualties of this trade war.
Consequently, investing in the industrial space makes perfect sense at this point. We have zeroed in on five industrial stocks which have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Our research shows that stocks with an impressive VGM Score of A or B when combined with a Zacks Rank 1 or 2, offer the best upside potential.
Our Picks
DXP Enterprises, Inc. DXPE: Houston, TX-based DXP Enterprises engages in distributing maintenance, repair, and operating (MRO) products, equipment, and services to energy and industrial customers in the United States. This Zacks #1 Ranked stock has a VGM Score of A. It has gained 24% over the past year. Over the past 90 days, the Zacks Consensus Estimate for earnings for fiscal 2018 and 2019 has moved north 13% and 9%, respectively. The earnings estimates for fiscal 2018 and 2019 indicate year-over-year growth of 98% and 23%, respectively. The company also has an average positive earnings surprise history of 112.62% over the trailing four quarters.
Luxfer Holdings PLC LXFR: Based in Manchester, the U.K., Luxfer Holdings is a materials technology company specializing in design, manufacture and supply of high-performance materials, components and gas cylinders. It currently has a Zacks Rank #1 and a VGM Score of A. Its shares have returned 60% over the past year. Over the past 90 days, the Zacks Consensus Estimate for earnings for fiscal 2018 and 2019 has moved north 18% and 15%, respectively. The Zacks Consensus Estimate for earnings for the current fiscal exhibits year-over-year growth of 64% while the same for the next fiscal is pegged at 14%. The company has delivered an average positive earnings surprise of 24.27% over the trailing four quarters.
Flowserve Corporation FLS: This Irving, TX-based Flowserve designs, manufactures, distributes, and services industrial flow management equipment in the United States, Europe, Middle East, Africa, Asia, and internationally. This Zacks #2 Ranked stock has a VGM Score of B. It has gained 11% over the past year. The Zacks Consensus Estimate for earnings for fiscal 2018 and 2019 has gone up 3% and 4%, respectively, over the past 90 days. The Zacks Consensus Estimate for earnings projects year-over-year growth of 28% for fiscal 2018 and 26% for fiscal 2019.
Zebra Technologies Corporation ZBRA: Lincolnshire, IL-based Zebra Technologies together with its subsidiaries, designs, manufactures, and sells a range of automatic identification and data capture (AIDC) products worldwide. The stock has a Zacks Rank #2 and a VGM Score of B. Its shares have surged 59% over the past year. Its estimates for fiscal 2018 and fiscal 2019 have undergone positive estimate revisions of 5% and 3%, respectively, over the past 90 days. The Zacks Consensus Estimate for earnings projects year-over-year growth of 54% and 8% for fiscal 2018 and 2019, respectively. The company also has an average positive earnings surprise history of 13.79% over the trailing four quarters.
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