4 Promising Industrial Stocks to Play the Sector's Rebound

The COVID-19 pandemic adversely impacted the Industrial Products sector in the earlier part of the year. Factory closures worldwide owing to restrictions imposed by several governments, pandemic-induced supply chain disruptions, low demand for goods and volatility in the energy market crippled the sector. The sector logged a decline of 18.3% in earnings in the first quarter of 2020 followed by a plunge of 35.3% in the second quarter, highlighting the slowdown in industrial production amid coronavirus crisis-hit demand. The sector is anticipated to witness a declines of 26% and a 17.6% in the third quarter and the fourth quarter, respectively, per our latest Earnings Trends report.

Sector Slowly Getting Its Bearings Back

Per the Institute for Supply Management, the Manufacturing Purchasing Managers’ Index (PMI) after posting readings of 50.9% in January and 50.1% in February slipped below 50 (which indicates contraction) to 49.1% in March. In April, it further contracted to 41.5% marking the lowest reading since April 2009.  However since then, the sector has slowly resumed its recovery with 43.1% in May and crossed the 50 mark in June with a 52.6% reading. It has remained above 50 for three straight months now and was 56% in August — the highest so far in 2020.

This signals that the sector seems to be coming out of the crisis, aided by gradual resumption of the global economic activities and reopening of businesses. Of the 18 manufacturing industries, 15 reported growth in August. The New Orders Index registered 67.6% growth in August, up from July’s index of 61.5%. The Production Index came in at 63.3%, up from July’s 62.1%. The Employment Index grew to 46.4% in August from 44.3% in July.

Also, the IHS Markit US Manufacturing PMI for September 2020 increased to 53.5 from 53.1 in August — the strongest expansion in factory activity since January 2019.

Further, according to the Federal Reserve, industrial production contracted 5.6% in the first quarter of 2020. In the second quarter, industrial production contracted at an annual rate of 48.0% — the largest quarterly decrease since the World War II. However, on a positive note, industrial production has been on the rise since May. In fact, it rose 0.4% in August for its fourth consecutive monthly increase. Manufacturing output continued to improve in August, increasing 1%.

The Industrial Products sector lost roughly 12.4% in the first half compared with the S&P500’s decline of 3.7%. However, the Industrial Products sector has staged an impressive rebound in the third quarter on pickup in orders and manufacturing activity. Industries across the sector are reporting stable-to-decreasing input costs and that their supply lines are no longer being impacted by COVID-19 related events. Notably, the Zacks Industrial Products sector has gained 11.9% quarter to date, outperforming the S&P 500’s rally of 8.1%.

Thus, it would be prudent to zero in on some quality stocks in the Industrial Products space that boast healthy prospects.

4 Industrial Stocks to Grab

We highlight the following four stocks, with a solid Zacks rank, that are worth considering for investment right now. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy), offer solid investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.

Astec Industries, Inc. ASTE The Chattanooga, TN-based company manufactures and sells equipment and components for the road building, aggregate processing, geothermal, water, oil and gas, and wood processing industries in the United States and internationally. It has a Zacks Rank #1 and a VGM Score of B. The company has an expected earnings growth of 13.6% for the current year. The consensus estimate for its current-year earnings has also gone up 50% over the last 60 days. The company has a trailing four-quarter earnings surprise of 124.3%, on average. The stock has appreciated 21% in the past three months.

Sealed Air Corporation SEE: This Charlotte, NC-based company provides food safety and security, and product protection solutions and equipment in North America, South America, Europe, the Middle East, Africa, and the Asia Pacific. The company currently has a Zacks Rank #2 and a VGM Score of B. It has an expected earnings growth rate of 3.6% for the current year. The Zacks Consensus Estimate for its current-year earnings has moved up 9% in the last 60 days. The company has a trailing four-quarter earnings surprise of 17.9%, on average. It has a long-term estimated earnings growth rate of 6.5%. The company’s shares have rallied 17% over the past three months.

Berry Global Group, Inc. BERY The Evansville, IN-based manufacturer and supplier of non-woven, flexible, and rigid products has a Zacks Rank #1 and a VGM Score of B. It has an expected earnings growth of 32.3% for the current year. The Zacks Consensus Estimate for its current-fiscal earnings has been revised upward by 11% over the last 60 days. The company has a trailing four-quarter earnings surprise of 16.3%, on average. The company also has an estimated long-term earnings growth rate of 10%. Its shares have gained around 8% over the past three months.

Fortune Brands Home Security, Inc. FBHS: Headquartered in Deerfield, IL, the company provides home and security products for residential home repair, remodeling, new construction, and security applications. The stock is currently has a Zacks Rank #2 and a VGM Score of B. It has an expected earnings growth of 6.2% for the current year. Over the last 60 days, the Zacks Consensus Estimate for its current-year earnings has been revised upward by 50%. The company has a trailing four-quarter earnings surprise of 19.4%, on average. Moreover, the company has an estimated long-term earnings growth rate of 7.3%. Its shares have also gained 37% in the past three months.

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