ETFs & Stocks Set to Surge on Solid Industrial Data

After a slow fourth quarter, the U.S. economy is gaining momentum with a rise in consumer spending and confidence. The latest upbeat industrial production data made the case even stronger, allaying fears of a recession that roiled the stock market at the start of this year and lowered the chance of an interest rate hike in March.

Industrial Data in Focus

Industrial output climbed 0.9% in January, representing the first increase in five months and the largest gain since November 2014. The robust numbers were credited to a massive blizzard in the Northeastern U.S. that drove demand for heating, resulting in a 5.4% higher output for utilities. Additionally, the manufacturing sector, which accounts for about 75% of the U.S. industrial production, rebounded with a 0.5% gain on increased spending on basics and durable goods like autos and furniture (see: all the Industrials ETFs here).

However, manufacturers will continue to suffer due to a strong dollar, weak global demand and low oil prices. The mining sector, which includes oil and gas drilling, was flat last month after four months of decline. Meanwhile, industrial capacity utilization inched up to 77.1% in January from 76.5% in December, and was above the analyst expectation of 76.7%.

The solid data suggests that the worst might be over for the U.S. factories as most of the manufacturing sectors are unaffected by the weak global trends. Given this, many industrial ETFs and stocks are poised to surge in the coming weeks owing to the recovering fundamentals. Below we highlight some of these.

ETFs

While there are several ETFs available in this space, we have highlighted three funds that have gained over the past one month and are expected to keep up their momentum in the coming months. Further, these funds have a favorable Zacks ETF Rank of 3 or ‘Hold’, suggesting room for upside.

First Trust Industrials/Producer Durables AlphaDEX Fund (FXR - ETF report)

This fund follows the StrataQuant Industrials Index, which uses the AlphaDEX methodology to select stocks from the Russell 1000 Index and ranks them on both growth and value factors. The approach results in a basket of 99 securities, which are widely spread out across components with none holding more than 2.13% of assets. In terms of industrial exposure, machinery takes the top spot with one-fourth share followed by 13.7% held by aerospace & defense. The fund has accumulated $114.3 million in AUM and sees a good trading volume of about 198,000 shares a day. It charges 63 bps in fees per year and gained 6.9% in the trailing one-month period.

Industrial Select Sector SPDR (XLI - ETF report)

This is the most popular ETF in the space with AUM of $5.5 billion and an average daily volume of nearly 14.7 million shares. The fund follows the Industrial Select Sector Index, holding 67 stocks in its basket. General Electric (GE - Analyst Report) takes the top spot at 11.7% while the other firms account for no more than 5.68% of XLI. About one-fourth of the assets is allocated to aerospace & defense while industrial conglomerates, machinery, and road & rail make up for a double-digit share each. This ETF charges 14 bps in fees per year and is up about 5.8% over the past month.
 
Vanguard Industrials ETF (VIS - ETF report)

This fund follows the MSCI US IMI Industrials 25/50 Index and holds about 343 securities in its basket. Here again, GE dominates the fund’s portfolio with 12.8% allocation while the other firms do not hold more than 4.4% of assets. From an industrial look, aerospace and defense takes the top spot at 23.9% followed by industrial conglomerates at 20.5%. The fund manages $1.8 billion in its asset base and charges 10 bps in annual fees. Volume is moderate as the product exchanges 128,000 shares a day on average. VIS gained 5.3% in the same one-month period.

Stocks

Many industrial stocks will undoubtedly see a huge price appreciation from the recovering fundamentals. As such, we highlight three stocks with a top Zacks Rank #1 (Strong Buy) or 2 (Buy) and a Momentum Style Score of A or B that are expected to outperform their peers in the months ahead.

Caterpillar Inc. (CAT - Analyst Report)

This Peoria-based Zacks Rank #2 company is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. The stock with a Momentum Style Score of B saw a 5.5% rise over the past four weeks. The uptrend is likely to continue given that the earnings estimates for the current year were revised up substantially by 40 cents over the past 30 days. Further, the P/E ratio of 16.21 for the stock is lower than the industry average of 17.89, suggesting that it is a bargain buy (read: 3 Momentum Stocks & ETFs to Play).
 
The Manitowoc Company Inc. (MTW - Analyst Report)
 
This Manitowoc-based Zacks Rank #2 company is a global leader in designing, manufacturing, and selling cranes and related products, and foodservice equipment. The stock, which has a Momentum Style Score of B, saw an upward earnings estimate revision of 5 cents over the past 30 days for 2016. In the past four weeks, the stock jumped 16.7%. Though this stock does not look cheap, it has an attractive earnings growth rate of 9.3% for this year compared to the negative industry average.
 
Sonoco Products Co. (SON - Analyst Report)

This Hartsville-based Zacks Rank #2 company is the global provider of consumer packaging, industrial products, protective solutions, and display and packaging services. The stock saw earnings estimates rising 3 cents over the past 7 days, suggesting some upside momentum in the coming weeks. Further, P/E of 15.31 is below the industry average of 15.95, pointing to an attractive entry point. SON has a Momentum Style Score of A and gained about 6.9% in the past four weeks.