While the overall economy has remained solid, we have had a slowdown in manufacturing over the past year. Though it certainly hasn’t led to a recession, it has led to an industrial slowdown. Fortunately, some of the recent data that tracks the sector has started to turn higher, and this could be the harbinger of an increase in manufacturing in 2020.
A Merrill Lynch new research report cites a rebound in heavy-duty truck orders, which could be a green shoot for the economy. The Institute for Supply Management is the oldest, and the largest, supply management association in the world, and the ISM manufacturing data it provides is tracked constantly. The numbers are looking better recently, and the Merrill Lynch team noted this:
One of the most correlated factors with the relative performance of the small cap benchmark (Russell 2000) is the ISM Manufacturing indicator. While still in contraction territory, the ISM ticked up last month from cycle lows; further sustained improvement could be positive for small caps as well as for US corporate profits overall (which are highly correlated to the ISM).
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The analysts screened the Merrill Lynch research universe looking for companies that had the highest statistically significant betas to the ISM manufacturing composite. Some 19 companies made the list, and here we focused on five that are Buy rated and may be more well known to investors.
Cimarex Energy
This remains a top play for investors looking to the Permian Basin. Cimarex Energy Co. (NYSE: XEC) is an independent exploration and production company. Its primary activities are in the Mid-Continent and Permian Basin areas of the United States.
The company focuses on increasing shareholder value through strategies linked to generating attractive economic returns on capital employed and profitable growth in per-share reserves, production and cash flow. It intends to profitably grow reserves and production through a balanced mix of exploration, exploitation and acquisitions.
Cimarex has a diversified base of high-quality production and attractive drilling opportunities. Note that hedge funds have initiated sizable new positions in the company over the past year, and like its brethren in the Permian, many consider the company a very solid takeover target.
Cimarex investors receive a 1.75% dividend. The Merrill Lynch price target for the stock is a gigantic $75. The Wall Street consensus target is much lower at $63.11. The shares closed trading on Wednesday at $45.77 apiece.
Deckers Outdoor
This clothing manufacturer makes some of the hottest selling products, and it could be poised for a big holiday selling season. Deckers Outdoor Corp. (NYSE: DECK) designs and markets footwear and accessories for men, women and children. Deckers sells its products, including accessories such as handbags, headwear and outerwear, through domestic and international retailers, international distributors and directly to end-user consumers both domestically and internationally, through websites, and retail stores under the UGG (73% of revenue), HOKA (14%), Teva (6%), Sanuk (3%) and Koolaburra (3%) brands.
The company posted solid fiscal second-quarter results and the analysts noted this:
Deckers reported fiscal second quarter 2020 EPS of $2.74, ahead of our $2.36 forecast driven by HOKA upside, better gross margins, buybacks and lower tax. HOKA (+49.9% year-over- year) momentum remains strong. UGG is still expected to grow low-single digits despite tough comparisons. Operating margin outlook also increased. We think guidance is still very conservative and expect more EPS upside.
Merrill Lynch has a price objective of $202, while the posted consensus target is $183.45. The last trade on Wednesday came in at $164.68.
Jazz Pharmaceuticals
This top company is a favorite at Merrill Lynch and across Wall Street. Jazz Pharmaceuticals PLC (NASDAQ: JAZZ) is a biopharmaceutical company that identifies, develops and commercializes pharmaceutical products for various medical needs in the United States, Europe and elsewhere.
The company has a portfolio of products and product candidates with a focus in the areas of sleep and hematology/oncology. The company’s largest products are Xyrem for narcolepsy (excessive daytime sleepiness), followed by Erwinaze for acute lymphoblastic leukemia and Defitelio for veno-occlusive disorder (blockage of blood vessels in liver). Analysts feel the growth opportunity from Vyxeos (expected to become new standard of care in secondary acute myeloid leukemia) and JZP-110 have the greatest upside potential.
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The $176 Merrill Lynch price target on Jazz Pharmaceuticals compares to the lower consensus figure of $170.88. The stock closed at $133.31 a share on Wednesday.
Masco
This lesser known stock has very solid growth potential. Masco Corp. (NYSE: MAS) is a leading building products company, manufacturing and selling paints, faucets, showerheads and other plumbing, cabinets, windows and other hardware products. Approximately 85% of 2018 sales were attributable to residential repair and remodel activity, with the remaining 15% from new residential construction.
The company’s portfolio of industry-leading brands includes Behr paint; Delta and Hansgrohe faucets, bath and shower fixtures; KraftMaid and Merillat cabinets; Milgard windows and doors; Kichler decorative and outdoor lighting; and HotSpring spas.
Masco offers investors a 1.16% dividend. Merrill Lynch has set a $54 price target for the shares. The analysts’ consensus target was last seen at $50.33, and the stock closed most recently at $46.67 per share.
24/7 Wall St.Wheaton Precious Metals
This precious metals company makes good sense for more conservative accounts looking to have exposure to the sector. Wheaton Precious Metals Corp. (NYSE: WPM) is a Canadian precious metals streaming company with approximately 60% of its revenues from the sale of silver and 40% from gold.
Under the terms of long-term contracts, the company purchases silver and gold from a variety of mines, including Goldcorp’s Penasquito mine in Mexico, Vale’s Salobo mine in Brazil, the Lundin Mining Zinkgruvan mine in Sweden, and Glencore’s Antamina and Yauliyacu mines in Peru, then sells the silver and gold into the open market.
Shareholders receive a 1.35% dividend. The Merrill Lynch price target is $35. The consensus target is slightly lower at $34.50, and the stock was changing hands at $26.59 as Wednesday’s trading came to a close.
While these are not manufacturing companies per se, remember that the analysts’ research shows significant potential for upside for these stocks when the ISM indicators rise. If they do in 2020, all these stocks could see their prices head higher.
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