The Industrial Boom: A Potential Supercycle

The United States may be on the brink of an industrial supercycle, thanks to the infusion of $2 trillion in federal spending geared towards infrastructure and electric vehicle development. This forecast has got everyone excited, especially those who favor the niche manufacturing companies that are not in the public eye.

The current performance of the industrial sector belies the potential boom. With the Industrial Select Sector SPDR exchange-traded fund (XLI) falling 2.1%, this is not the absolute lowest among S&P 500 sectors, with the Real Estate Select Sector SPDR ETF (XLRE) dropping 4.9%, but it is not the highest either, as the Health Care Select Sector SPDR ETF (XLV) only dipping 0.2%.

But this is a good time to invest in industrial stocks despite this dip. In addition to new spending and personal views, there are other reasons that recommend increasing exposure to manufacturing stocks now. The most compelling one is that the industrial economy is starting to bottom out.

The Institute for Supply Management Purchasing Manager Index (PMI) is an indicator of whether the U.S. manufacturing economy is on the rise. The PMI has reported contraction for seven months consecutively, its longest stretch in twenty years being eleven consecutive months from September 2008 when the global crisis hit bottom. There is hope for June when a new reading of ISM PMI data comes out on July 3, with expectations of a rise to 47.4 from the 46.9 of May.

If this is to be believed, things will only go uphill from here on out – a sentiment that inspired Fundstrat managing partner Thomas Lee’s recommendation to increase manufacturing exposure in May. Lee reiterated his call this week, citing better-than-expected home sales and building permit numbers as the reason for the renewed push towards industrial manufacturing investments.

Are you wondering where to start with investing? Perhaps it’s time to look at what the federal government is eyeing and find stocks that align with that direction. Here are some popular stocks whose outlooks are looking brighter due to the reshoring of manufacturing, infrastructure spending, and the electrification of everything – a term coined to cover the influx of EVs and renewable energy. With the $1.2 trillion Infrastructure Investment and Jobs Act and $500 billion Inflation Reduction Act looking to boost these areas, it’s worth having them on your radar.

  • United Rentals (URI)
  • Deere (DE)
  • Eaton (ETN)
  • Schneider Electric (SBGSY)
  • Quanta Services (PWR)
  • Johnson Controls International (JCI)

United Rentals and Deere offer construction equipment services, while Quanta specializes in building complex electrical infrastructure. For electrical equipment manufacturing, Eaton and Schneider are top choices. Johnson Controls is a heat pump seller, ideal for home heating and cooling via electricity.

These stocks have received high recommendations from analysts. Approximately 70% of analysts covering these companies are rating them as a buy – well above the average buy-rating ratio of 55% for stocks in the S&P 500. Moreover, all six companies are expected to have earned growth in the upcoming years with a recent increase in 2024 earnings estimates.

When it comes to trading, their range is wide. On average, they trade about 17 times 2024 estimated earnings, slightly below the S&P 500 multiple of 18 times. However, United Rentals trades at around nine times earnings, while Quanta trades at around 23 times earnings. You can consider investing in these popular stocks that have a good outlook as the buying opportunity arises.

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