U.S. manufacturing is in the very early phase of a renaissance — and it will take years for the manufacturers of finished goods to see the full benefits of this turnaround. What companies are benefiting right now? Those companies making what I call Big Iron, even though few goods are made with iron any more. Stable energy prices created by the U.S. energy boom benefit those manufacturers, allowing them to lower energy costs in the U.S. to run their factories and bolstering general economic recovery underway.
There are no hidden gems here – they are out in the open, known — and undervalued because Wall Street still has put energy and manufacturing in the same sentence. What a surprise. And the rebound starts with the automakers.
The key to auto sales is not income, it is the relative cost of a new car payment compared to repairs and gasoline costs for an older car and the average credit score needed to get a loan. The score needed to get a loan is very low, but auto loan defaults are also below historical norms, so it is not a problem. The average age of a car on the road is more than 10 years. Trade that dog in for a car requiring no maintenance and getting much better gas mileage and the math works, creating strong demand.
What about profitability? Ford (F) and General Motors (GM) both have new versions of their most profitable vehicles — medium and heavy-duty pickup trucks — out this year, and margins are very high compared to other vehicles. This trend will accelerate as the economy recovers and more trucks go into service. Both companies are going to make natural-gas-powered pickups — even more profit margin to capture — and I see many years of solid growth.
I visited the GM pickup truck assembly plant as part of my research for my book, Made in America. What stood out was an emphasis on quality that puts GM trucks ahead of all others in J.D. Power rankings and GM and Ford together beating out foreign competition in that crucial category of performance.
At present, if you are looking for an options play, take a look at selling close in weekly puts against GM. If you sold the $36.50 (the stock is currently 36.88) you would net around $25 a contract. Sounds like a mini trade? Multiply that fifty times – — it is a weekly, remember? — and you have a return of 34% — a pickup truck-sized return.
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