The U.S. is seeing a quiet rise in reshoring, or the return of manufacturing activity and jobs into America. That could be good news for at least 12 manufacturing stocks.
The Institute for Supply Management Purchasing Manager Index, or PMI, registered 60.7 for December on Tuesday. A level above 50 indicates the manufacturing sector is growing. Economists were projecting 56.8 ahead of the news—so above 60 qualifies as a big beat.
U.S. manufacturing activity is heating up as companies re-evaluate supply chain risk amid geopolitical concerns. Congress, for instance, passed a bill potentially delisting Chinese stocks that don’t meet U.S. audit standards in December.
Tariffs, which have roiled global supply chains for the past few years, are also influencing the manufacturing recovery—and reshoring. Tariffs change the math for sourcing low-cost parts from foreign locations. Manufacturing locally is more attractive in an environment with higher and varying tariff levies on imported goods.
Companies also have to contend with the Covid-19 crisis-—in what could be the biggest impact on global supply chains of all. In 2020, the pandemic shut down manufacturing in various parts of the world, creating parts shortages in others. Production was disrupted whether plants were locked down by local authorities or not.
The pandemic took its toll on all sectors, including manufacturing, in 2020: The PMI bottomed out at about 41.5 in April. Some of the index’s improvement can be attributed to the U.S. economy reopening over the past few months—but other factors are at work, too. And reshoring is part of the story, even if the clues are hard to spot.
“Look at fabricated metal products,” ISM PMI chair Tim Fiore tells Barron’s. “Fabricated metal products is the number one industry [in the PMI survey] and still doing well—that is [the] direct result of fabrication being reshored.”
Fabricated metal products includes things such as pipe, fasteners, cans, siding and anything else people can think of that is made of metal. The category is one of six sectors that together generate about 70% of all U.S. manufacturing activity, according to Fiore. The other five sectors in that group are electronics, transportation, chemicals, and energy.
More fabricated metal production means more work for U.S.-based steel companies such as United States Steel (ticker: X) and Nucor (NUE). Those stocks have gained about 160% and 30%, respectively, over the past six months. Steel commodity prices rose about 80% over the same span.
The boom in fabricated metal products is Fiore’s example of reshoring, but there are others. Bank of America analyst Andrew Obin recently wrote that manufacturing employment growth is shifting to North America.
“Between 2009 and mid-2017, industrial companies were primarily focused on growing jobs in Asia versus North America,” Obin wrote in a December research report. However, his more recent data sources show that U.S.-based industrial workforces are growing faster than Asian ones.
Obin calls reshoring a key theme for 2021. He gives Buy ratings to five stocks he sees benefiting the most from this trend: Eaton (ETN), Parker-Hannifin (PH), Fortive (FTV), Emerson Electric (EMR) and Rockwell Automation (ROK).
Rockwell and Emerson make automation equipment used in manufacturing facilities. The other three supply capital equipment or products required by new manufacturing employees.
UBS strategist Niall MacLeod points out that labor costs and productivity still make China a low-cost region to manufacture goods, despite tariffs and shipping. That argues against reshoring from a purely cost perspective. But the gap compared with other regions is narrowing.
MacLeod’s report adds Zebra Technologies (ZBRA), Cognex (CGNX), ABB (ABB), Honeywell International (HON) and Schneider Electric (SU.France) to the list of automation suppliers benefiting from more capital spending directed into the U.S. and away from Asia.
MacLeod doesn’t actually cover those stocks; other analysts at UBS do. Not all are Buy rated even though all benefit from the reshoring theme. Zebra, Eaton and Schneider are rated Buy by the brokerage firm.
Reshoring is a small piece of the industrial recovery and the industrial stock puzzle. The improving health of the global economy as well as a trend toward renewable energy generation—which generates more demand for capital equipment—are parts of that puzzle, too. For investors in 2021, it looks like a lot of those puzzle pieces are falling into place.
Write to Al Root at [email protected]
