Over the past few months, U.S.-China trade tensions have been easing, the global economy has shown signs of rebounding and stocks have been surging to all-time highs. This is how things will go on for the foreseeable future. Ignore the recent market turmoil on fears that trade talks are breaking down. What we have here is just some last-minute chest puffing from both sides. At the end of the day, neither side wants Dec. 15 to roll around, no deal to be struck and tariffs to be implemented in a big way.
As such, I think it is fairly likely that a partial trade deal is struck by Dec. 15. That partial trade deal will significantly de-escalate global trade tensions, which will spark a sustained rebound in the global economy.
What does all that mean for investors? It may be time to buy manufacturing stocks.
The logic is simple. The U.S.-China trade war started in January 2018. Over the subsequent 18 months, that trade war has only become more and more serious, creating more and more global geopolitical uncertainty. That rising geopolitical uncertainty has depressed corporate confidence everywhere, and companies have increasingly peeled back on their capital spending plans. As they have, industries that rely heavily on capital spending — like the manufacturing industry — have been hit hard.
But, over the past few months, tensions have meaningfully de-escalated. This de-escalation has breathed confidence back into the corporate sector. See the rebounding manufacturing Purchasers Managers Index readings from across the globe. Over the next few months, this renewed confidence will inspire reinvigorated capital spending in the manufacturing sector, which will provide a broad boost to all manufacturing stocks.
With that in mind, let’s take a look at six manufacturing stocks to buy for 2020 as the global economy rebounds.
Manufacturing Stocks to Buy: General Electric (GE)
First up we have industrial conglomerate General Electric (NYSE:GE).
General Electric makes most of its money by selling products into the manufacturing industry. When that industry is weak, GE’s growth trends are weak, too. Similarly, when that industry is strong, GE’s growth trends are strong.
Over the next few quarters, the manufacturing industry will come back to life. As it does, demand in GE’s aviation, healthcare and power businesses should get a sizable boost.
GE stock is partially priced for this boost. After all, shares are up 30% over the past three months, and trade hands at a relatively rich price-to-earnings ratio of 16.4. But, considering all the other good stuff going on here — leverage reduction, operational simplification, cash flow improvements — GE stock warrants its rich valuation, and should continue to trend higher into 2020 as the global economy rebounds.
Construction equipment giant Caterpillar (NYSE:CAT) should perform better now that the economy is in rebound mode.
Caterpillar operates multiple businesses. But, at its core, the company sells heavy-duty machinery and equipment to the construction, mining, forestry, energy and transportation industries. Those industries together comprise the backbone of the manufacturing economy. Thus, as capital spending in the manufacturing economy has been weak over the past few quarters, those industries have struggled. So has Caterpillar.
Fortunately, a rebound is coming soon. Global manufacturing trends are picking up steam amid easing trade tensions. So long as trade tensions keep easing, companies in the construction, mining, forestry, energy and transportation industries will regain confidence. As they regain confidence, they will spend more money on equipment and machinery, and most of that money will find its way onto Caterpillar’s income statement.
The result will be recharged revenue and profit growth for Caterpillar. CAT stock, at just 13-times forward earnings, isn’t priced for this renewed growth. As such, shares should surge higher from here.
Global technology and manufacturing giant Honeywell (NYSE:HON) can break out to new highs behind an improving economic outlook.
Honeywell is a very big company with a lot of moving parts. But, when you break it all down, the company sells various hardware products and software solutions across a variety of industries, ranging from aerospace to building construction, and most everything in between. Naturally, this gives the company tremendous manufacturing economy exposure. When times are good in the manufacturing economy, times are also good at Honeywell, and vice versa.
Times have not been good in the global manufacturing economy for the past 18 months. They are now in the early stages of becoming good. As manufacturing conditions improve over the next few quarters, demand for Honeywell’s various hardware and software products will grow. And so will Honeywell’s revenues and profits.
Honeywell stock will rise, too, but not by as much as revenues and profits. HON stock trades at over 19-times forward earnings today. That’s a rich multiple for this stock. Sure, it’s warranted because of core manufacturing economy improvements. Nonetheless, the valuation is also rich enough that you won’t get anymore multiple expansion here, so all future gains will be driven by profit growth (which should be good enough).
Construction equipment giant Deere (NYSE:DE) is positioned to win big as U.S.-China trade tensions ease.
Deere sells equipment, machinery and related service parts into the agriculture, construction and forestry industries. These industries have been particularly disadvantaged by escalating U.S.-China trade tensions, as lower capital spending has meant less money for new construction. Plus, China has stopped buying U.S. agriculture products. As demand across these industries has weakened, so has Deere’s revenue and profit growth trajectories.
That’s all about to change. Phase one of a U.S.-China trade deal is said to include China agreeing to purchase $20 billion worth of U.S. farm goods. If that deal gets struck, phase two will likely come with even more farm goods purchases. At the same time, rebounding capital spending trends imply that new construction will ramp back up, and that should translate into demand growth for Deere’s construction equipment.
Easing U.S.-China trade tensions will bring growth back into Deere’s core markets. As that growth comes back into the picture, DE stock — which trades at just 15-times forward earnings — can and will head higher.
Global industrial giant 3M (NYSE:MMM) is positioned to get back on a solid growth track as the global manufacturing economy rebounds in 2020.
Over the past several quarters, 3M’s growth trajectory has meaningfully weakened amid falling demand across the entire manufacturing economy. That growth trajectory is still weakening today. 3M just reported third-quarter numbers that weren’t all that great, and included a messy and largely uninspiring fourth-quarter guide.
Most of this weakness is due to escalating geopolitical uncertainty, which has weighed on capital spending trends in the manufacturing economy. That geopolitical uncertainty projects to ease in 2020 with the signing of phase one of a U.S.-China trade deal. That will spark a rebound in manufacturing capital spending, which will lead to 3M’s growth trajectory re-accelerating higher.
MMM stock isn’t priced for this re-acceleration. At 17-times forward earnings, MMM stock is trading below its historically normal valuation levels (roughly 20-times forward earnings). Thus, over the next few quarters, MMM stock should rebound behind a double tailwind of renewed profit growth and multiple expansion.
Agriculture equipment manufacturer Agco (NYSE:AGCO) appears well positioned to head higher in 2020 as the global agriculture economy finds its footing.
The agriculture industry has been at the epicenter of the U.S.-China trade war. It started with tariffs impacting the volume and price of product the industry could move around. It ultimately turned into China withdrawing its purchases of U.S. farm goods. This double demand headwind hit the agriculture industry hard, and with farmers falling on tough times, they stopped ordering as much Agco equipment.
Phase one of the U.S.-China trade deal will change all of this. As part of that deal, China will come back into the market for buying U.S. farm goods, while tariffs will be temporarily sidelined. In other words, phase one of a U.S.-China trade deal will greatly reduce the two big headwinds which have hurt AGCO stock over the past few quarters.
As those headwinds shrink, Agco’s growth trends will improve. Those growth trend improvements coupled with multiple expansion — shares trade at just 14-times forward earnings — should propel meaningful outperformance in AGCO stock.
As of this writing, Luke Lango was long GE.