The U.S. is on the cusp of an industrial supercycle, partly fueled by $2 trillion in spending coming from new federal plans for infrastructure and electric-vehicle development.
That possibility is like catnip for this former engineer and current industrial reporter who often recommends shares of hard-to-understand manufacturing companies that few have ever heard of.
You wouldn’t know a boom is coming from looking at how the industrial sector performed this past week. The
Industrial Select Sector SPDR
exchange-traded fund (ticker: XLI) dropped 2.1%. That’s not the worst-performance in the
S&P 500
—that honor goes to the
Real Estate Select Sector SPDR
ETF (XLRE), which dropped 4.9. But it’s also far from the best: The
Health Care Select Sector SPDR
ETF (XLV) slipped just 0.2%.
Still, this looks like a good time to buy the industrial dip. Besides all that new spending and reporter biases, there are other reasons for increasing exposure to manufacturing stocks now. The best is that the industrial economy looks to be finally bottoming out.
The Institute for Supply Management Purchasing Manager Index, or
PMI,
shows whether the U.S. manufacturing economy is growing. The PMI has registered contraction for seven consecutive months. That’s a long time. The longest streak in the past 20 years was 11 consecutive months beginning in September 2008, right at the nadir of the financial crisis. A new ISM PMI reading is due on July 3, and it’s expected to show a rise to 47.4 in June, from 46.9 in May.
If the worst is behind the sector, things are bound to improve. That dynamic was behind Fundstrat managing partner Thomas Lee’s call to increase manufacturing exposure in May. This week he reiterated that call, writing that it had “new traction,” as existing-home sales and building permits, reported this week, came in better than expected.
But what to buy? One plausible strategy is don’t fight the federal government. Look for popular stocks with improving outlooks tied to the reshoring of manufacturing, infrastructure spending, and the electrification of everything, a catchall term for the effect that EVs and renewable energy are having on the economy. These are all getting a boost from the $1.2 trillion Infrastructure Investment and Jobs Act and the $500 billion Inflation Reduction Act.
United Rentals
(URI),
Deere
(DE), Eaton (ETN),
Schneider Electric
(SBGSY),
Quanta Services
(PWR), and
Johnson Controls International
(JCI) are among the stocks that fit the bill.
United Rentals and Deere provide equipment for construction. Quanta builds complex electrical infrastructure. Eaton and Schneider make equipment for electrical infrastructure. Johnson Controls sells heat pumps that electrify home heating and cooling.
These are popular stocks with analysts. Almost 70% of those covering the companies rate the shares a Buy, well above the average Buy-rating ratio of 55% for stocks in the S&P 500. All six are expected to grow earnings in the coming years, and 2024 earnings estimates have been going up in recent months.
The sextet trades for about 17 times 2024 estimated earnings, on average, a little below the S&P 500 multiple of 18 times. But the range is wide. United Rentals trades for about nine times earnings, while Quanta trades for about 23 times.
They’re as good a place to start as any when a buying opportunity finally presents itself.
Write to Al Root at [email protected]
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