Profit From The Economic Recovery With
Industrial Stocks
The Dynamic Wealth Report
September 10, 2009
Industrials Poised For A Breakout?
by Robert Morris, Editor
The long awaited economic recovery has begun. The green shoots first
spotted in February have survived the harsh winter of the recession. They’ve sprouted and blossomed into an economic recovery growing
stronger by the day.
How do we know this?
A very important economic indicator is telling us the recovery is for
real. I’m talking about the Institute for Supply Management’s Purchasing
Managers’ Index (PMI).
The Institute for Supply Management (ISM) is a non-profit trade group
for the supply management profession. It’s the largest association of
supply management professionals in the world with over 40,000 members.
ISM is responsible for publishing the monthly Manufacturing Report on
Business. This report is considered by many economists to be the most
reliable short-term economic barometer available.
I realize the ins and outs of an economic indicator are not incredibly
exciting. Take a moment to refill your coffee cup and keep reading. I’ve
got a great way for you to profit from this information.
But, first a quick refresher on how the PMI indicator works.
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ISM’s manufacturing report is well respected because it’s based on hard
data rather than conjecture. Every month the 300 purchasing and supply
executives on ISM’s Business Survey Committee complete a questionnaire
about business conditions.
The questionnaire is designed to get the facts on things like changes in
production, new orders, employment, inventories, and prices to name a
few. It’s no wonder the report provides a highly accurate monthly view
of business conditions.
Each monthly report provides tons of information about the manufacturing
sector. But, the most widely followed data point is the PMI. This
important indicator is a composite index of five critical components of
the monthly survey – new orders, production, employment, supplier
deliveries, and inventories.
Using a formula, ISM compiles the answers on the monthly questionnaire
into a single number between 0 and 100.
Here’s what it means for investors.
PMI tells us how the manufacturing sector is doing. This important
sector is where recessions tend to show up first. It’s also where we’ll
find the first signs a recession is ending. (Important info… don’t you
think?)
The key number for PMI is 50. When PMI is 50 or higher, it means
manufacturing is expanding. If manufacturing is expanding, the economy
as a whole should be expanding too.
Conversely, a reading below 50 signals the manufacturing sector is
contracting. This usually means the economy is in, or heading into, a
recession.
Keep in mind, the raw number is only part of the story. The trend in PMI
from month to month is very important to understanding how the market
will react.
Ok, enough with the economics lesson. Let’s see what PMI is telling us
right now.
The indicator jumped from 48.9 in July to 52.9 in August. For the first
time in 18 months, PMI registered a reading above 50. This is absolutely
huge news.
PMI is signaling the economic expansion has begun.
Economists are already scrambling to raise their growth forecasts. For
example, Goldman Sachs raised their outlook for third quarter GDP growth
from 1% to 3%.
So, how can we profit from this information?
You might invest in one or more of the large cap industrial stocks.
Companies like 3M (MMM), Boeing (BA), and
United Technologies (UTX) are
all good options. These industrial giants are heavily leveraged to an
economic recovery.
However, as many of you know, I’m partial to smaller companies.
One small industrial company that I like right now is BWAY Holding
Company (BWY). They make metal and rigid plastic containers for
manufacturers of industrial and consumer products.
Based on the PMI data, we know manufacturers are starting to increase
production. That means more containers are needed to package finished
products. BWY is perfectly positioned to benefit from this trend.
Throughout the recession, BWY focused on increasing productivity and
cutting costs. They’re now a lean, mean container-making machine.
And, these measures have already begun to bear fruit.
Last quarter, net income increased nearly 5% to $8.5 million, or $0.36 per
share. Excluding a one-time restructuring charge, adjusted net income
surged a whopping 45% to $13.9 million, or $0.59 per share. That beat
analysts’ estimates by 40%!
Analysts are now scrambling to increase their earnings estimates on BWY
for this year and next. This is great for shareholders as higher
earnings tend to drive the stock price higher.
The August PMI data indicates what we’ve suspected for several months. Not only is the recession over, the manufacturing sector and the economy
in general are beginning to expand. Economically sensitive sectors like
the industrials should see big improvement in revenue and earnings going
forward.
And, so should their stocks.
Now’s the time to add exposure to the economic recovery with strong
industrial stocks. Take a look at a few of these ideas… especially BWY. They might be a great fit with your investment strategy.
Alternative Energy ETFs are jumping higher. PowerShares
WilderHill Clean Energy (PBW) is up more than 5.5% in the past
two days. Surging oil prices, buyout rumors, and new deals in the works
are igniting a rally in the industry. Higher oil prices make alternative
energy sources more cost competitive.
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