The Great American Manufacturing Revival

 | Dec 30, 2013 | 9:30 AM EST
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As we head into the New Year, finding investable themes for the coming 12 months should be on most investors' to-do lists. Regular readers of my columns know one of my favorite themes of the past two years has been fracking -- and how it, and the resulting energy boom, have become key domestic economic drivers on U.S.'s way to energy independence.

These developments have yielded numerous great investment opportunities over the past couple of years in related exploration-and-production concerns, refiners, oil-services plays and firms benefiting from the associated energy infrastructure build-out. I believe this theme will continue to play out over the next several years.

Now I'm looking at another theme -- one that I believe is just where the "fracking" thesis was back in 2010: the revival of American manufacturing.

The two themes are interconnected, as industrial electricity rates continue to fall in the U.S., and North America has by far the lowest natural gas prices in the developed world. As a result of this, foreign multinationals have been compelled to spend billions to set up new facilities in this country. In but one example, BASF and other foreign chemical firms are building multi-billion-dollar plants on the Gulf Coast in order to take advantage of our bountiful and cheap natural gas.

A more competitive domestic manufacturing environment is also driving capital-allocation decisions at American-based manufacturers. General Motors (GM) is a good microcosm of this development. The company is seeking to reduce its manufacturing footprint in Europe, South Korea and Australia -- and, at the same time, it's investing more than $1 billion to update plants in Michigan, Ohio and Indiana.

Low energy prices, combined with some gains in the "right to work" movement, are making domestic manufacturing more attractive and cost-competitive. I would look for this trend to accelerate job gains in the years ahead, and I believe this story will get more press coverage in 2014.

I also believe this is one of the key reasons industrials nicely outperformed the overall market in 2013, and I would look for this outperformance to continue next year. If an investor wishes to position their portfolio toward such plays, a simple way is by overweighting an industrial ETF, such as the Industrial Select Sector SPDR (XLI).

This is also why I continue to like General Electric (GE), another good industrial-sector proxy. GE is not currently as undervalued as it had been earlier in the year, but it does trade in line with the overall market multiple. The company has a growing global backlog of big-ticket industrial goods, such as jet engines. In addition, the stock pays a 3.2% dividend.

The aforementioned GM is also in my portfolio, as I think the stock is still cheap at under 9x forward earnings. It also should benefit from the government's recent sale of its remaining stake in the company. On a broader level, domestic auto manufacturing should remain strong in 2014 and Europe is slowly recovering -- and GM itself is seeing strong growth in China.

Domestic chemical manufacturers are also well-positioned to continue benefiting from low natural gas prices. Eastman Chemical (EMN) shares looks attractive at current levels, trading around 11x forward earnings. Eastman's profit should grow at a healthy 10% clip in 2014. The shares also yield at 1.8%, as the company just hiked its dividend payout by 17%. UBS just initiated the shares with a Buy rating, as well.

As investors review their capital-allocation strategy for the New Year, the increasingly competitive American industrial sector continues to look attractive. This manufacturing renaissance is also a story that I think will get more play in 2014.

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