Even though it may not feel like it, let me reassure investors that we are, in fact, in a recovery. Persistent unemployment and the general hangover in the housing market may mask many of the good things going on in the economy right now, but we are growing, albeit at a slower rate than we might like. Consumer spending is up, and overall confidence has bounced back up from its lows. And new data shows that one major area of the economy is ahead of the curve when it comes to capitalizing on the economic rebound.
Building business
According to recent Institute for Supply Management data, the manufacturing supersector is on fire. The April ISM factory index hit a reading of 60.4 in April, the highest level since June of 2004. Any ISM reading over 50 indicates expansionary activity. According to the numbers, the manufacturing sector has been expanding since last August. April's reading hints that manufacturing is going strong, and that segment of the economy is likely to continue to gain strength and boost employment in the coming months.
Of course manufacturing has been shrinking as a share of GDP in our country for nearly 50 years now. Services now make up the vast majority of business within our nation. And while the services sector is on the road to recovery as well, it's not quite as strong as manufacturing is right now. The most recent March reading stood at 55.4, marking only the third month that the services index surpassed the expansionary mark. But given that manufacturing traditionally rebounds before the service sector does at the end of a recession, we're pretty much on track. Given the strength of the goods-producing sector, now is a good time to profit from some companies that make their living in this space.
Manufacturing profits
If you're a diversified mutual fund investor, you've likely already got some decent exposure to this expanding area of the economy. According to Morningstar data, the average large blend fund dedicates roughly 36% of its portfolio to the manufacturing super sector, which includes industrials, energy companies, and utilities. Some superstar fund managers are even more heavily weighted to this market segment. For example, the management team at top-ranked Oakmark Equity & Income I (OAKBX) has directed roughly 60% of the fund's equity assets to this super sector. Here, the fund's managers prefer industrials such as General Dynamics (NYSE: GD) and aviation-electronics maker Rockwell Collins (NYSE: COL), based on the belief that the outlook for these politically challenged industries are not nearly as negative as commonly thought. They believe that General Dynamics should benefit from its participation in our nation's cyber-defense efforts, while Rockwell Collins is likely to benefit from an improving production outlook from aircraft manufacturers Boeing (NYSE: BA) and Airbus.
While you should be able to get a reasonable exposure to the manufacturing sector through your larger mutual fund allocations, there are additional options for investors who desire more targeted exposure. If you want to zero in on this area of the market, consider a low-cost exchange traded fund. Two good choices here are iShares Dow Jones US Industrials (NYSE: IYJ) or Vanguard Materials ETF (NYSE: VAW), which clock in with expense ratios of 0.48% and 0.25%, respectively. Just make sure you keep your overall allocation to dedicated funds like these on the smaller side to avoid the risk of big blow-ups.
Top prospects
However, if the thrill of the individual stock-picking chase thrills you, there are some good names in this space that you might want to check out. Small-cap gem Simpson Manufacturing (NYSE: SSD) is one of the world's largest suppliers of structural building products. Given the company's dominant positioning in its industry, its healthy balance sheet, and the fact that it stands to benefit significantly as the housing market stabilizes, there's a lot of upside here. Similarly, mining concern Freeport McMoRan Copper & Gold (NYSE: FCX) boasts a return on equity in excess of 56% while enjoying gross margins and sales growth rates that are greater than those of its peers. And given that the stock trades at a P/E almost half that of the industry average, this one seems quite reasonably valued given its prospects.
In general, I expect that the manufacturing arena should do quite well in the coming months as economic growth continues to settle in and factories start humming again, although valuations aren't nearly as compelling as they were a year ago. Investors should still maintain a meaningful exposure to the service-based economy, given that this super sector dominates our economy. But if you're looking to capture profits from one of the segments of our economy on the leading edge of the recovery, manufacturing is where the action is -- at least for now.
