Industrial Sector Beckons

By Eric Fox | August 19, 2009 AAA

Two recent reports from the Federal Reserve on the manufacturing sector seem to indicate that the economic cycle has bottomed and an expansion is at hand. While some investors might feel they have missed out on the recent market rally in response to this bottoming, not all stocks have shared in this move up.

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Economic Report Card #1
The first report was the Empire State Manufacturing Survey, which is a monthly report released by the Federal Reserve Bank of New York. The index of general business conditions had a reading of 12.08 in August, up from a negative number in the previous month. The index of Future Business Conditions came in at 48.22, also up from the previous month.

This survey gets sent to 200 manufacturing executives across the state and is seen as an important guidepost on the strength of the economy.

Economic Report Card #2
The second report was from the Federal Reserve Bank of Philadelphia, which conducts a monthly survey of manufacturers in the Third Federal Reserve District. This district covers Delaware, Eastern Pennsylvania and Southern New Jersey. The diffusion index of current activity, which is the broadest measure of economic activity in the survey, increased from -7.5 in July to 4.2 in August.

Other indexes in this survey also surged higher. The current new orders index also hit 4.2, up from -2.2 the previous month, and the current shipments index increased 10 points. Both the New York and Philadelphia indexes were at the highest levels since November 2007.

One thing that should be noted about these two surveys is that they are restricted geographically to a small part of the Northeast, which might limit its usefulness when applying its conclusions nationally. Although many industrial names have had huge upside moves, there are still several others that are down year to date that might provide an opportunity for intrepid investors.

Stocks Yet To Recover

  1. Vulcan Materials Company (NYSE:VMC) and Martin Marietta Materials (NYSE:MLM) are both down year to date, although both up significantly off the March 2009 lows. Both these companies make aggregates and other materials for the construction industry.

    During its recent quarter, Vulcan Materials said that the sales price for aggregates was up 3% over the same quarter of last year. Martin Marietta Materials saw a 4% price increase in its quarter.

  2. Stericycle Inc. (Nasdaq:SRCL) is in the garbage business, but in the niche line of medical waste. The stock is down 25% from its 52-week high, and just reported second-quarter profits up 17.5% from the same quarter in 2008.

  3. Emerson Electric (NYSE:EMR) is a manufacturer of various electrical components for a variety of industries, and is also off 25% from its 52-week high. The company reported flat sales but $800 million in free cash flow in its third fiscal quarter.

The Bottom Line
The market has moved sharply as investors discount the upcoming economic expansion. However, there are opportunities out there for sharp-eyed stock pickers who want to participate in the next move up. (To learn more, see our Economic Indicators Tutorial.)

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