Are we on the verge of a new era of prosperity for American industry and manufacturing stocks? It certainly seems possible. The novel coronavirus has put supply chain risk into focus like never before. Americans are suddenly worried about where vital goods are produced, and the country’s reliance on China seems set to decline in coming years. Even if President Trump loses his re-election bid, it’s likely that the U.S. will distance itself from Asian suppliers going forward.
As such, much of that manufacturing has to be relocated. Some will go to other foreign countries with cheap labor and better trade agreements, such as Mexico. But a good chunk of it should come right back to the U.S. Reshoring — the return of outsourced manufacturing jobs to the U.S. — is popular with politicians and makes increasing economic sense as well.
Thus, it’s time to look for manufacturing stocks to buy. Particularly with the market in a bit of a tailspin lately, a lot of these manufacturing leaders are back on sale. These are seven worth checking out now:
- 3M (NYSE:MMM)
- Caterpillar (NYSE:CAT)
- Bruker (NASDAQ:BRKR)
- Spirit Aerosystems (NYSE:SPR)
- General Dynamics (NYSE:GD)
- Whirlpool (NYSE:WHR)
- Kimball Interntional (NASDAQ:KBAL)
Manufacturing Stocks to Buy: 3M (MMM)
Quick quiz: Do you know what 3M’s name stands for? Answer: Minnesota Manufacturing and Mining. The full name should be a tip-off for why this belongs on any list of manufacturing stocks to look at now.
Over the years, 3M has evolved dramatically. Thankfully it does far less mining nowadays, as it has instead shifted to higher value-added products. While the company may be most famous with consumers for Post-It notes, it has tens of thousands of products spanning nearly all industries. Food, energy, work safety, medical, government and more, 3M makes stuff for that.
MMM stock is a core holding for many growth and income investors, and with good reason. Shares currently go for just 17x earnings, which is a bit lower than usual for the manufacturing powerhouse. The stock peaked at $250 two years ago, and is selling for just $160 now. Meanwhile, the starting dividend yield is up to 3.7%. 3M increases its dividend every year. So, starting off that base, investors should be rewarded richly in coming years.
Caterpillar stock is an interesting play at this point. In many ways, it benefits from a global recovery. Mining equipment, oil and gas extraction, infrastructure building, new home and office construction — all these Caterpillar end markets rely on a healthy economy. Thus, if you’re wanting to bet on Covid-19 winding down quickly and things starting to normalize, CAT stock is a high-powered play.
It also works as an inflation hedge. Many of those Caterpillar product uses, such as in construction and mining, thrive in inflationary conditions. With central banks creating a ton of money around the world, it sets the stage for a potential inflationary wave. Many investors buy gold, silver or cryptocurrencies to hedge themselves against that risk. That’s not necessarily wrong.
But buying a profitable asset is generally a preferable approach. You don’t get any operating profits or yield from holding a gold bar. The only possible upside is from people paying a higher price in the future for it.
Caterpillar, by contrast, earns a profit of 5-7% of your invested capital every year, and pays out a big chunk of that as dividends to you while you own it. Additionally, if inflation really runs wild, as certain forecasters predict, Caterpillar’s profits would soar. Look at CAT stock’s returns during the 2003-11 commodity supercycle if you want further proof of that. All of this adds up to make CAT stock one of the better manufacturing stocks to buy now.
Bruker International (BRKR)
Unless you work in the sciences, you probably don’t know Bruker and have no clue why it’s a solid contender among other manufacturing stocks to buy. However, this high-end lab equipment company has stealthily emerged into a fierce competitor. Shares of BRKR stock are up 800% over the past 15 years as the company has piled up consistent double-digit annualized earnings growth.
Bruker has a couple of edges against peers. One, it’s a family business. The current chairman owns around a quarter of the company and has become a billionaire thanks to his wise leadership in past decades. For long-term investors, this is exactly what you want to see — an aligned management team with tons of skin in the game and their own family name to protect. Not surprisingly, Bruker runs itself conservatively and operates with little debt.
Second, Bruker has built its brand on quality. It sells high-end machinery and prides itself on having the best product. It doesn’t compete primarily on price, and thus isn’t going to sport the biggest market share or revenue growth. But it earns a fat profit margin on its orders and it gets repeat business.
BRKR stock has underperformed this year thanks to the pandemic. Many of Bruker’s customers have held off on buying lab equipment until there is more clarity on capital budgets going forward. But make no mistake, the customers will be back sooner than later.
Bruker gets half its sales from universities and non-profits and the other half from commercial customers such as biotech firms and hospitals. These are fast-growing segments with easy access to capital and favorable demographics, thus they aren’t going anywhere. Bruker stock is going for just 24x forward earnings now, a healthy discount to the 30x+ multiples you see at many of its immediate peers in the scientific tools space.
Spirit Aerosystems (SPR)
Are you bullish on aerospace but not comfortable with Boeing (NYSE:BA)? That’s perfectly reasonable given the massive headaches around Boeing’s 737 program and potential liabilities with that. With the pandemic in the mix as well, it’s hard to get thrilled about Boeing shares here, particularly after weak earnings.
However, give one of their leading suppliers, Spirit Aerosystems, a look. Spirit makes shipsets, which are the building blocks of jets and include the fuselage, wings among other components. Production virtually ground to a halt with Boeing’s problems. However, Spirit envisions getting back to 10 737’s a month early next year as output slowly increases.
Interestingly enough, Spirit’s stock is down 75% in recent months, actually making it a worse performer than Boeing. Yet Spirit doesn’t have the same legal liabilities from the plane crashes that Boeing does. Meanwhile, it’s likely that if Boeing survives (which is probable) its major suppliers will as well. There is little incentive for Boeing or the government to allow Spirit to fail, and take thousands of high-quality American manufacturing jobs with it.
Spirit stock is down from $80 to $18 with the twin blows of Boeing’s safety problems and the pandemic. As those terrible events start to fade, Spirit should be able to enjoy an impressive recovery in coming months.
General Dynamics (GD)
Next up, we have another better than Boeing alternative. Looking for military based manufacturing stocks whose share prices have gotten hammered? There are quite a few to choose from; however, let’s go with General Dynamics here.
General Dynamics has a few things going for it. One, it’s a Dividend Aristocrat, which means that it has increased its dividend at least 25 years in a row. Combine that with a 3% starting dividend yield. Result: GD stock is a solid blue chip growth and income play in these volatile times.
Furthermore, General Dynamics is highly diversified. It has many lines of defense business for the military. It isn’t tied to sales to just one product or branch of the armed services. On top of that, General Dynamics also has its Gulfstream private jet business. It seems the market is worried about this, thanks to Covid-19. However, I suspect private jet demand will be surprisingly strong as the rich still have money and will value social distancing more than ever. If there was a time for celebrities to fly private instead of first class, now is that time.
In any case, General Dynamics will continue pumping out profits and dividends long after the health emergency has ended. And at just 12 earnings now, the stock is certainly priced right.
The housing market is on fire right now. The quarantines have created a demand for improved living conditions unlike any other. The Federal Reserve’s easy money policy has also driven record-low interest rates. Combine the two, and you have a sizzling housing market, despite the otherwise weak economy.
And what do people also buy when they buy houses? That’s right, they need appliances. Enter Whirlpool. Whirlpool makes tons of basic household goods such as dishwashers and refrigerators. These aren’t glamorous lines of business, and investors often shy away from the space.
However, in a market like this, a company like Whirlpool can truly thrive. Demand is through the roof. Meanwhile, supply is fairly constricted. You generally can’t just flip a switch and double your output of washing machines, for example. Given the shortages for many housing-related goods, there has been strong pricing power, and discounts are virtually non-existent.
Long story short, Whirlpool has a double catalyst. The booming housing market will keep appliance demand elevated. And the concern around cheap goods manufactured in China is good for rivals. Whirlpool, which relies on North America for production, is in the driver’s seat going forward.
Kimball International (KBAL)
Anything related to housing is hot right now, as we’ve discussed. This brings us to furniture, and specifically Kimball International. Kimball’s stock has not enjoyed the same run as its peers, such as Herman Miller (NASDAQ:MLHR), just yet. The reason for that seems clear — prior to the pandemic, Kimball focused more on selling furniture to schools, businesses, hospitals and other such institutions.
However, Kimball is already adopting to the environment in multiple ways. It has stepped up e-commerce efforts and prioritized furniture for home-schooling and home offices. In this current cocooning environment that we’re in, people are willing to spend heavily on improving their personal offices and studies.
Even once that catalyst passes, Kimball is a cheap stock with a ton of upside. It’s at just 10x earnings and pays a 3.5% dividend now. Shares of peers such as Herman Miller have already soared in recent weeks. Kimball could easily follow as it reports its own earnings. And even if the stock doesn’t move immediately on its results, it’s an attractive holding on its merits. All of that makes it one of the key manufacturing stocks to consider moving forward.
On the date of publication, Ian Bezek held long positions in BRKR and GD stock.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.