Overweighting U.S. Manufacturing

 | Oct 24, 2013 | 12:00 PM EDT
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In these columns on Monday and Tuesday we discussed how critical sector weighting is to overall portfolio performance. I also went through myriad reasons why my own portfolio is currently underweight the consumer discretionary  and financial sectors

In the columns today and Friday, I will reveal two sectors I see a lot of value in and why. I will also offer some equity picks that I hold within their sectors. Both of the sectors in which I am significantly overweight offer solid values. They also consist of businesses that are beacons of hope in an overall disappointing economic recovery.

We will look today at the industrial sector, which is being buoyed by the beginning of a renaissance in American manufacturing. This is being driven by several factors. One of the biggest factors is the improving competitiveness throughout a variety of industrial businesses across the United States.

We currently enjoy the lowest industrial energy prices in the developed world, especially in natural gas. This has been driven by the massive energy boom in North America over the last five to six years, enabled by new shale resources and new technology.

 Industrial electricity prices have dropped more than 10% over the last five years. Contrast this to another major manufacturing power, Germany. Thanks to the phasing out of nuclear and huge subsidies being allocated to increasing alternative energy sources, German industrial electricity prices have shot over 45% in the past half-decade. This is a huge competitive swing.

Wages in China also continue to grow at a double-digit annual rate, which is slowly eroding their competiveness. The rise in just-in-time inventory measures and customers that want their goods faster is also causing some industries to bring work home from overseas.

Although few policies at the federal level over the past five years could be tagged as "pro-business", some states are leading the way in making changes to improve their competitive posture. Michigan, the home of the UAW, recently became the latest "right to work" state.

I believe American manufacturing is where domestic energy production was five years ago. You can see the changing landscape and observe that the environment is becoming more positive. It is hoped that these changes lead to same type of game- changing events we have witnessed from domestic oil and gas production recently.

I believe the industrial sector in this country is in a good position to thrive and valuations within the space are reasonable. In addition, major industrial components like Boeing (BA) and Ingersoll Rand (IR) have already reported stellar results this quarter.

Regular readers of my column know that I have been bullish on Ford (F) throughout 2013. I still like the auto manufacturer despite the gains in its stock this year. The company is killing it in North America, gaining market share in China and could really see more significant upside if its European operations start to improve. It just delivered earnings results this morning that should be well received by the market. Ford is going to continue to go higher.

General Electric (GE) is another core industrial holding that is delivering solid results. The company delivered another solid earnings report late last week. It has a record order backlog that stands at some $230 billion. The company has done an impressive job over the last year or two in deemphasizing/downsizing its financial businesses and shedding its media assets.

The industrial giant also will continue to grow its energy services businesses. The stock should continue to be rewarded a higher multiple by the market as it becomes a pure play industrial concern. The shares yield 3% and dividend growth should continue to be core factor in owning this equity.

Finally, I still like Foster Wheeler (FWLT), although it has posted a solid gain since the last time I profiled it in August. This huge engineering & construction concern should continue to benefit from the accelerating energy infrastructure build out (LNG terminals, upstream processing facilities, chemical plants) happening domestically and throughout the world. Revenue growth is expected to increase to the mid-teens in 2014 after being in the low single digits this fiscal year.

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