U.S. Business Investment Rebounds In May: 5 Top Picks

On Jun 26, the Department of Commerce released U.S. factory orders for long-lasting durable goods in May. Although the orders contracted, the rate of decline was much less than the previous month.

Moreover, core durable goods order –- a key metric to track business investment plan –- jumped significantly. The shipment of core durable goods also increased to a large extent in May. These two metrics provide a major relief to the market’s concern that investment softened in the manufacturing sector primarily owing to the lingering trade dispute with China.

Durable Goods Orders Weak But Not Disappointing

The Department of Commerce reported that new orders for manufactured durable goods declined $3.3 billion or 1.3% to $243.4 billion in May from April. The consensus estimate was of a decline of 0.8%. However, durable goods orders in April declined 2.8% (revised data). This indicates that the rate of decline in capital goods orders actually halted in May.

Moreover, the decline in May’s durable goods order was primarily attributed to a 28.2% drop in non-defense aircraft orders. This tepid result was mainly due to lack of orders for the troubled 737 MAX aircraft of The Boeing Co. (NYSE:BA) .

Motor vehicles and parts orders rebounded 0.6%, while Orders for transportation equipment plummeted 4.6%. Overall durable goods shipments rose 0.4% and inventories increased 0.5% in May.

Core Durable Goods Orders Jump in May

More important information from the report is that the core durable goods order (which exclude defense aircraft) jumped 0.4% in January after witnessing a sharp fall in the previous three months. This also reflects the highest monthly gain of core factory orders since January. Notably, this metric declined 1% in April.

Last month, leading performers for core durable goods were heavy machinery, primary metals, computers and networking gear. Meanwhile, in May, core capital goods orders rose 2.3% year over year. Shipments of core capital goods increased 0.7% in May compared with 0.4% (revised data) in April.

Implication of Strong Core Durable Goods Data

Industry researchers are highly concerned about future capital spending by the U.S. manufacturing sector due to the prolonged tariff battle between the United States and China and an impending global economic slowdown. However, core capital goods data for May indicate that business spending is likely to continue although the pace may decline to some extent.

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Shipment of core capital goods is a leading metric to calculate equipment spending in the U.S. government’s GDP measurement. Notably, the manufacturing sector constituted nearly 12% of U.S. GDP.

Lingering trade conflict between the United States and China took a toll on the manufacturing sector. A large section of U.S. manufacturing companies is dependent on low-cost inputs from China which acts as intermediary product for heavy industrial sector. However, imposing of tariff on several of these intermediary products by the Trump administration raised input cost for those U.S. companies.

Consequently, business confidence dented and investors postponed investment plans. Notably, the first quarter of 2019 witnessed contraction of business spending on equipment for the first time in three months. Therefore, stabilization of business investment in May will act as a major boon to the manufacturing industry. Notably, business investment in the 12 months ended in May rose 1.4% from 1.2% in April.

Our Top Picks

Against this backdrop, it will be prudent to invest in stocks with a favorable Zacks Rank that are poised to gain from the solid core factory orders data. We narrowed down our search to five such stocks. Each of these stocks carry a Zacks Rank #2 (Buy). You can see Zacks Investment Research