Industrials: Valuations stretched, but opportunities still exist

The sector has outperformed in conjunction with several months of positive manufacturing and housing data, but we still see some compelling names.

Brian Bernard, CFA, CPA 7 July, 2016 | 5:00PM

After reviewing our global coverage of industrial stocks, we noted that only two companies boasted 5-star ratings. One hundred and twenty-four companies (or 71% of our coverage) have lower than a 4-star rating, indicating that our analysts believe these stocks are, at best, fairly valued.

Manufacturing data turned positive in the United States, but remained challenged in other markets. In May, the U.S. Institute for Supply Management (ISM) manufacturing purchasing managers' index (PMI) came in at 51.3. This was indicative of manufacturing expansion but was still below peak readings achieved in 2015 (53.9) and 2014 (58.1). May marked the third consecutive month of expansionary readings in the U.S. The ISM New Orders Index also remained strong in May, which is indicative of a sustainable recovery despite the strong dollar and weak commodity prices.

Manufacturing data was less rosy throughout the rest of the world. The Markit Eurozone Manufacturing PMI registered 51.5--still expansionary, but the lowest reading in three months. New European export order growth was at a 16-month low, as businesses reported difficult domestic and export markets. The Caixin China Manufacturing PMI contracted in May to 49.2, versus 49.4 in April. The China Manufacturing PMI has been below the 50.0 neutral level for 15 consecutive months. Finally, the Markit Brazil Manufacturing PMI dipped to 41.6 as businesses reported worsening economic conditions. May marked the worst reading for Brazil since February 2009, and 87 consecutive months below the 50.0 neutral level.

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Brian Bernard, CFA, CPA

Brian Bernard, CFA, CPA  Brian Bernard, CFA, CPA, is an equity analyst for Morningstar.

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