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4 Stocks to Bet on Despite Slowdown in Manufacturing

Zacks

After exhibiting growth for 35 consecutive months, the U.S manufacturing sector contracted in August primarily owing to the U.S.-China trade turbulence. Per the Institute for Supply Management’s latest report, Purchasing Managers’ Index (PMI) for August declined to 49.1% from 51.2% in July — lowest reading since January 2016’s reading of 48%. Even though the manufacturing sector had shown signs of deceleration over the past four months, this was the first instance where the reading has fallen below 50.

Of the 18 manufacturing industries, nine reported growth in August. New Orders Index registered 47.2% in August, contracting from 50.8% in July, bringing an end to 43 months of continuous expansion. Production Index came in at 49.5% in August, down from the 50.8% registered in July, a decline following growth for 35 consecutive months. Employment Index registered 47.4% in August, down from July’s 51.7%. The index also contracted after 34 consecutive months of employment growth.

Notwithstanding the dip, the PMI has averaged 54% over the last 12 months ranging from a low of 49.1% to a high of 59.5%.

This Industrial Products sector has underperformed the S&P 500 market owing to concerns regarding the impact of tariffs. Given that steel is a primary raw material, every company involved in manufacturing bore the brunt of rising steel prices owing to tariffs. In the past year, the sector has declined 8.9% while the S&P 500 gained 1.9%.



Much Hopes Pinned on a Truce

Any positive development on the United States-China trade war front will aid the sector’s recovery. Further, continued improvement in residential and non-residential construction, and revival in infrastructure demand bode well for the industry. Mining companies are also resuming capital spending backed by improvement in commodity prices.

Moreover, the manufacturing companies continue to combat cost inflation to sustain their margins through pricing actions and cost control, increasing productivity and eliminating waste.

Stocks Set to Grow Despite the Dip in Manufacturing

We have zeroed in on four industrial stocks which have a Zacks Rank #2 (Buy) and a VGM Score of A. 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 (Strong Buy) or 2, offer the best upside potential. Further, these companies have healthy earnings growth expectations.

You can see the complete list of today’s Zacks #1 Rank stocks here.

AGCO Corporation AGCO: This Duluth, GA-based company has estimated long-term earnings growth rate of 13.41%. The Zacks Consensus Estimate for earnings for fiscal 2019 and fiscal 2020 reflect year-over-year growth of 31.11% and 8.68%, respectively. The Zacks Consensus Estimate for fiscal 2019 and 2020 has moved up 3% and 2%, respectively, over the past 90 days. The company has an average positive earnings surprise of 33.84% in the trailing four quarters.

Albany International Corporation AIN: The Zacks Consensus Estimate for earnings for this Rochester, NH-based company for fiscal 2019 and fiscal 2020 reflect year-over-year growth of 33.85% and 10.03%, respectively. The Zacks Consensus Estimate for fiscal 2019 and 2020 has moved north 3% and 2%, respectively, over the past 90 days. The company has an average positive earnings surprise of 15.98% in the trailing four quarters.

Mueller Water Products, Inc. MWA: This Atlanta, GA-based company has an average positive earnings surprise of 1.43% in the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2019 and fiscal 2020 reflect year-over-year growth of 18.87 and 9.81%, respectively. The Zacks Consensus Estimate for fiscal 2019 and 2020 has moved up 5% and 1%, respectively, over the past 90 days. The company has an estimated long-term earnings growth rate of 15%.

UFP Technologies, Inc. UFPT: This Newburyport, MA-based company has an average positive earnings surprise of 9.81% in the trailing four quarters. The Zacks Consensus Estimate for earnings for fiscal 2019 and fiscal 2020 indicates year-over-year growth of 8.10% and 23.79%, respectively. The Zacks Consensus Estimate for fiscal 2019 and 2020 has moved north 2% and 3%, respectively, over the past 90 days.

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