Fresh data from the Institute of Supply Management showed that manufacturing staged a recovery last month. This came as welcome news for the sector after the contraction experienced in August. Even though some experts say that manufacturers still face an inimical environment, new orders rose, raising optimism about the sector.
Meanwhile, the latest GDP report indicates that the economy grew at a faster pace in the second quarter than what was earlier estimated. Additionally, the situation is likely to improve over the second half of the year. Picking industrial stocks seems to be a good option at this point in time.
Manufacturing Returns to Positive Territory
The ISM Manufacturing Index increased by 2.1 percentage points to a level of 51.5% during the month of September. The reading exceeded the consensus estimate of 50.3% as well as the level of 49.4% registered during the month of August. The manufacturing index had dropped to 49.4% in August from the level of 52.6% witnessed in July. Any reading below 50 indicates contraction in manufacturing activity.
Several components of the report indicated that manufacturers were experiencing better times. A gauge for new orders increased by 6 percentage points to 55.1% while the index for production rose by 3.2 percentage points to 49.6%. The institute’s gauge for employment remained in contractionary territory at 49.7%, but increased by 1.4 percentage points from the level of 48.3% witnessed in August.
Q2 GDP Reading Improves, Second Half Looks Brighter
Meanwhile, the “third” estimate for second-quarter GDP came in at 1.4%, higher than the second estimate of 1.1%. The reading also exceeded expectations of a 1.3% increase. Contrary to the earlier estimate of a slump, business inventories improved over the second quarter. Nonresidential fixed investment increased by 1% rather than falling 0.9% as was estimated earlier. (Read: 5 Best Performing Stocks of September)
Additionally, the Fed expects that GDP will increase by 1.8% in 2016, indicating that the second half will be better for the economy. In the last FOMC policy statement, Fed Chair Janet Yellen said that there were strong indications that the economy is starting to grow at a faster pace.
In the latest developments on the regulatory front, the Atlanta Fed reduced its estimate for third-quarter growth from its earlier estimate of 2.4%. At 2.2%, however, it still remains appreciably higher than the quantum of growth experienced during the first half of the year.
Our Choices in the Sector
Despite the numerous difficulty it faces, an increase in the key ISM gauge means that conditions have improved for manufacturing. Additionally, the revised reading for second-quarter growth and indications of a pickup in the second half of the year bode well for the sector.
Adding select manufacturing stocks seems to be a good option at this point. However, picking winning stocks may prove to be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
We have narrowed down our search to the following stocks based on a good VGM score and a Zacks Rank #1 (Strong Buy). Stocks with a Zacks Rank #1 have always managed to beat adversities and outperform the market.
Worthington Industries, Inc. (WOR) is one of the leading diversified metal processing companies. It is one of North America’s premier value-added steel processors and one of the leaders in manufactured metal products.
Worthington Industries has a VGM Score of A. The company has expected earnings growth of 26.4% for the current year. Its earnings estimate for the current year improved by 18.3% over the last 30 days.
Berry Plastics Group Inc (BERY) is a manufacturer and marketer of value-added plastic consumer packaging and engineered materials.
Berry Plastics Group has a VGM Score of B. The company has expected earnings growth of 35.3% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 15.98, lower than the industry average of 18.08.
Packaging Corp of America (PKG) is one of the largest producers of container board in the U.S. and a leading manufacturer of corrugated packaging products.
Packaging Corporation has a VGM Score of B. The company has expected earnings growth of 6.8% for the current year. It has a P/E (F1) of 16.73, which is lower than the industry average of 18.08. Its earnings estimate for the current year improved by 0.9% over the last 30 days.
Brady Corp (BRC) is a manufacturer and marketer of identification solutions and specialty coated materials.
Brady Corp has a VGM Score of B. The company has expected earnings growth of 6.2% for the current year. Its earnings estimate for the current year improved by 4.9% over the last 30 days.
Lakeland Industries, Inc. (LAKE) is engaged in manufacturing and selling of a full range of safety garments and accessories for the industrial protective clothing market.
Lakeland Industries has a VGM Score of B. Its earnings estimate for the current year improved by 42.5% over the last 30 days.
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