The domestic manufacturing sector continued to expand in April, racking up its second straight month of gains. Despite a decline in the rate of growth, it is clear that manufacturing is on track for a steady recovery and may continue to gain in the months ahead.

A weaker dollar, higher crude prices and soft interest rates mean that conditions will continue to remain favorable for this sector. It makes good sense to select manufacturing stocks when you’re looking to make additions to your portfolio at this point.

Manufacturing Continues to Expand

The Institute for Supply Management (ISM) manufacturing index decreased from 51.8% in March to 50.8% in April, lower than the consensus estimate of 51.3%. However, it hovered above 50, the level which demarcates whether the sector is expanding or contracting. The reading in March had broken a chain of five consecutive months of contraction for the sector.

During this time, manufacturers were beset by a number of problems. These included a stronger dollar which had lowered the attractiveness of exports. Meanwhile, oil prices continued to decline leading to pressures on domestic energy companies. At the same time, the Fed made its first interest rate hike in nearly a decade.

Dollar Halts Surge, Boosts Exports

However, the tide seems to be turning for manufacturers. The dollar has declined following indications that the Fed is in no hurry to raise rates. As a result, exports have become more competitive. The ISM export index has moved up to its highest level since Nov 2014.Oil prices also gained in April due to a weaker dollar, fall in the U.S. rig count, rising gasoline consumption and supply disruptions.

These are probably the primary reasons responsible for the growth experienced by 11 of the 18 manufacturing sectors in April, according to the ISM survey. At the same time input costs have increased. The sector was spending more on raw materials in April compared with March levels. However, this has likely been factored in after a year of soft material prices and may have hit a more sustainable level.   

Our Choices

Despite a slight decline in April, prospects for the manufacturing sector have improved over the last two months. Several factors have helped the sector expand and they will continue to support its expansion in the months ahead.

This is why it would be smart to pick manufacturing stocks with the sector on the verge of further growth. However, it may be difficult to pick winning stocks.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Valmont Industries, Inc. (VMI - Analyst Report) is primarily engaged in the production of fabricated metal products, metal and concrete pole and tower structures and mechanized irrigation systems in the U.S. and abroad.

Valmont Industries has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 13.9% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 21.34, lower than the industry average of 22.27. Its earnings estimate for the current year has improved by 2.9% over the last 30 days.

Franklin Electric Co., Inc. (FELE - Snapshot Report) is a manufacturer of submersible electric motors and engineered specialty electric motor products and electronic controls.

Franklin Electric has a Zacks Rank #2 and a VGM Score of A. The company has expected earnings growth of 9.9% for the current year. Its earnings estimate for the current year has improved by 1.5% over the last 30 days.

Xylem Inc. (XYL - Analyst Report) is one of the leading providers of water solutions worldwide.

Xylem has a Zacks Rank #2 and a VGM Score of B.The company has expected earnings growth of 9.1% for the current year. Its earnings estimate for the current year has improved by 0.9% over the last 30 days.

Kaiser Aluminum Corporation (KALU - Snapshot Report) is a producer of fabricated aluminum products for aerospace and high strength, general engineering, automotive, and custom industrial applications.

Kaiser Aluminum has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 33.5% for the current year. Its earnings estimate for the current year has improved by 2.8% over the last 30 days.