Business Spending On Capital Goods Rallies: 5 Top Picks

New orders for major U.S.-made capital goods improved more than expected in April, as per Friday’s Commerce Department data. A decent rebound in business equipment orders placed with factories indicated resilient demand at the start of the second quarter. Philly Fed factory orders also touched a 45-year high in May.

The pace of economic boom is levelling out in the United States and by no means signals a downturn. Trump’s December tax overhaul policy and rising oil prices is shoring up business spending. Notably, last week, the Republican government had hinted at a fresh round of tax cuts prior to the midterm elections in November.

Against this backdrop, investment in select business equipment stocks seems sensible.

U.S. Capital Equipment Orders Trend Higher

Barring civilian aircraft and machinery, growth in orders was fairly broad-based in April, spanning electrical equipment, metals and computers.

On a year-over-year basis, core capital goods orders flared up 6.6% in the month, beating the market forecast of a paltry 0.7% growth.

Defence capital goods orders were up 3.1% in April, following the plunge of 21.2% in the prior month. Excluding aircraft, non-military capital goods orders, a proxy indicator for business spending plans, rose 1% month over month against the dip of 0.9% in March.

April orders of appliances, electrical equipment and components increased 2.6%, outperforming 2.4% gains recorded in March. Electronic products and computers orders were also up 1.1%, on a month-over-month basis.

Shipments of core capital goods were up 0.8%, in contrast with the drop of 0.7% in the previous month. This is used to estimate equipment spending in the U.S. GDP measurement.

In addition to this, May’s Philly Fed manufacturing index surged to its peak in a year at 34.4, above the prior month’s reading of 23.2. The new orders index also climbed up 22 points in this month at 40.6, marking its highest level since March 1973.

What’s Driving the Rally?

Business spending keeps on rallying at a healthy pace in Trump’s land. The Republican administration’s $1.5 trillion Tax Cuts and Jobs Act slashed corporate tax rates from 35% to 21% from this year and offered an additional tax break on repatriated overseas profits of U.S. corporations. The signature legislative plan is helping to improve liquidity of the American businesses.

However, the absolute benefit of lower corporate taxes has not yet materialized. Going forward, tax cuts will likely speed up investments in factories, new equipment and other capital goods. We also certainly believe that additional tax cuts prior November will further spike up corporate capital equipment investments going ahead.

Coupled with the White House’s economic policies, higher oil prices is increasing cash inflow of businesses and in turn encouraging capital investments. A massive downfall in Venezuelan output and Trump’s decision to exit the Iran nuclear deal will likely continue to back the oil price rally going forward.

5 Top Picks

Upturn in U.S. capital equipment orders in April’s durable goods report indicates that investment in select business equipment stocks (offering computer parts, electrical equipment etc.) will likely be a masterstroke move.

Below we have handpicked five such stocks that should be meaningful additions to your portfolio. These stocks sport a Zacks Rank #1 (Strong Buy) or 2 and flaunt a VGM Score of A or B.

Stoneridge, Inc. (NYSE:SRI) manufactures and develops electronic and engineered electrical components, systems, and modules for the commercial, automotive, agricultural vehicles and off-highway markets.

The Zacks Consensus Estimate for earnings has moved up 5.1% to $2.07 per share for fiscal 2018, in the last 30 days. Notably, the projected year-over-year earnings growth rate for this Michigan-based company is currently pegged at 31.9% and 7.6% for 2018 and 2019, respectively. Stoneridge’s shares have gained 18.4% in the past month. The company sports a Zacks Rank #1 and VGM Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.

ZAGG Inc (NASDAQ:ZAGG) designs, manufactures and sells mobile tech accessories for tablets and smartphones in the global forum.

The company carries a Zacks Rank #1 and has a VGM Score of B. The Zacks Consensus Estimate for earnings has moved up 5.3% to $1.38 per share for 2018, in the last 30 days. Notably, the projected year-over-year earnings growth rate for this Utah-based company is currently pegged at 42.3% and 8% for 2018 and 2019, respectively. ZAGG’s shares have gained 36.2% in the past month.

Super Micro Computer, Inc. (NASDAQ:SMCI) offers high performance server solutions based on open and modular architecture. The company also provides a range of networking devices in the market.

The company has a Zacks Rank #2 and VGM Score of A. The Zacks Consensus Estimate for earnings has moved up 15.4% to $1.87 per share for fiscal 2018 (ending June 2018), in the last 30 days. Notably, the projected year-over-year earnings growth rate for this California-based company is currently pegged at 19.1% and 26.7% for fiscal 2018 and 2019, respectively. Super Micro’s shares have gained 33.9% in the past month.

Regal Beloit Corporation (NYSE:RBC) manufactures and sells electrical motion control, power transmission and power generation products worldwide.

The company holds a Zacks Rank #2 and VGM Score of B. The Zacks Consensus Estimate for earnings has moved up 5.6% to $5.88 per share for 2018, in the last 30 days. Notably, the projected year-over-year earnings growth rate for this Wisconsin-based company is currently pegged at 20.7% and 10.2% for 2018 and 2019, respectively. Cabot Microelectronics’ shares have gained 12.9% in the past month.

Cabot Microelectronics Corporation (NASDAQ:CCMP) manufactures and sells pads and polishing slurries used to develop advanced integrated circuit devices in the worldwide semiconductor industry.

The company has a Zacks Rank #2 and VGM Score of B. The Zacks Consensus Estimate for earnings has moved up 4.2% to $4.91 per share for fiscal 2018 (ending September 2018), in the last 30 days. Notably, the projected year-over-year earnings growth rate for this Illinois-based company is currently pegged at 37.9% and 12.8% for fiscal 2018 and 2019, respectively. Cabot Microelectronics’ shares have gained 10.5% in the past month.

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