Profit From The Economic Recovery With Industrial Stocks

| September 10, 2009 | 0 Comments

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.

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.

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Category: Bonds

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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