Manufacturing Activity Rebounds to One-and- a-Half-Year High: 5 Picks

The manufacturing sector is finally showing signs of recovery as new orders and production continue to increase. Manufacturing activity increased in March to its highest level in one-and-a-half years although raw material prices remained high and employment subdued.

Manufacturing Sector Poised to Grow

The Institute for Supply Management’s (ISM) survey on Apr 1 suggests that the sector, which took a major hit owing to higher interest rates, is rebounding at a solid pace. The ISM said that its manufacturing PMI rose to 50.3 in March, its first and highest reading above 50 since September 2022.

Factory output also rebounded, with the production sub-index surging to 54.6 in March from 48.4 in the prior month.

Economists had forecast a reading of 48.4. February’s reading came in at 47.8. The March reading also ended 16 consecutive months of contraction in manufacturing activity. Any reading above 50 means expansion in manufacturing activity, which accounts for nearly 11% of the economy.

Manufacturing activity started slowing in the second quarter of 2022 as inflation peaked at a 40-year-high of 9.1%. Raw material costs soared and new orders started shrinking. The Federal Reserve adopted a strict monetary tightening policy and started hiking interest rates.

Higher borrowing costs left the sector in 2023 as the Federal Reserve’s monetary tightening campaign took the benchmark policy rate from the 0-0.25% rate in March 2022 to 5.25-5.5% in June 2023.

The Federal Reserve’s actions saw inflation decline sharply to reach the present rate of around 3.2%. The central bank hasn’t increased interest rates since July 2023 and has hinted at least three interest rate cuts by the end of this year.

Rate cuts bode well for the broader economy and the manufacturing sector, as lower borrowing costs will further ease price pressures.

Our Choices

Given this scenario, it would be ideal to invest in five stocks from the manufacturing sector — Hubbell Incorporated HUBB, A. O. Smith Corporation AOS, Eaton Corporation plc ETN, Applied Industrial Technologies, Inc. AIT and DNOW Inc. DNOW — that we have detailed below. These stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and assure good returns. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hubbell Incorporated is engaged in the design, manufacture and sale of electrical and electronic products to commercial, industrial, utility and telecommunications markets. HUBB’s products include plugs, receptacles, connectors, lighting fixtures, high-voltage test and measurement equipment, and voice and data signal processing components.

Hubbell Incorporated’s expected earnings growth for the current year is 7.1%. The Zacks Consensus Estimate for current-year earnings has improved 0.1% over the past 60 days. HUBB, at present, has a Zacks Rank #2.

A. O. Smith Corporation is one of the leading manufacturers of commercial and residential water heating equipment and water treatment products in the world. AOS specializes in offering innovative and energy-efficient solutions and products, which are developed and sold on a global platform.

A. O. Smith’s expected earnings growth for the current year is 6.8%. The Zacks Consensus Estimate for current-year earnings has improved 0.7% over the last 60 days. AOS currently carries a Zacks Rank #2.

Eaton Corporation plc is a diversified power management company and a global technology leader in electrical components and systems. ETN sells products in more than 175 countries and has 92,000 employees.

Eaton Corporation’s expected earnings growth for the current year is 12.4%. The Zacks Consensus Estimate for current-year earnings has improved 1.6% over the past 60 days. ETN presently carries a Zacks Rank #2.

Applied Industrial Technologies, Inc. is a distributor of value-added industrial products — including engineered fluid power components, bearings, specialty flow control solutions, power transmission products and miscellaneous industrial supplies. AIT’s products are mainly sold to original equipment manufacturers, and maintenance, repair, and operations customers in Australia, North America, Singapore and New Zealand.

Applied Industrial Technologies’ expected earnings growth for the current year is 7.7%. The Zacks Consensus Estimate for current-year earnings has improved 1.7% over the past 60 days. AIT currently has a Zacks Rank #2.

DNOW Inc. is a supplier of energy and industrial products and packaged, engineered process and production equipment. DNOW offers a broad set of supply-chain solutions combined with a suite of digital solutions branded as DigitalNOW, which provides customers technology for digital commerce, data and information management.

DNOW’s expected earnings growth for the current year is 5.2%. The Zacks Consensus Estimate for current-year earnings has improved 9.7% over the past 60 days. DNOW currently sports a Zacks Rank #1.

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