I can find many reasons to be negative on the market after its significant rally over the last few months. These include high gas prices, the expiration of the payroll tax holiday, tepid job growth for this point in the business cycle, Europe and the implementation of the Affordable Care Act -- the last of which will have substantial costs for businesses, and whose impacts are still a relative unknown at the moment.
Still, outside of the continued largesse from Federal Reserve, I see two huge positives right now for the economy and the market. First, the housing-market recovery looks to be real -- and, given the low housing builds of the last few years, the rebound could be in its early innings. The second huge positive is the continued impressive expansion of domestic energy production.
I am hoping that the third positive leg will be what some are calling the renaissance of American manufacturing. The private sector has seen declining unionization over the last several decades, which has resulted in a corresponding decrease in strikes and increases in worker flexibility. This, combined with a significant increase in deployment of technology, has produced a huge increase in productivity.
More important, the substantial expansion of domestic energy supplies, especially in natural gas, has resulted in wholesale electricity price dropping by roughly half since 2008. Contrast this with another huge manufacturing nation, Germany, where electricity costs to industrial users has increased some 40% over that same time frame due to alternative-energy subsidies. This is a major cost advantage for American manufacturers who enjoy the lowest energy costs in the developed world. It is the main driver behind why Sasol (SSL) and others are building multi-billion-dollar plants in the U.S. close to cheap natural gas sources.
In my own portfolio, I am using funds freed up by selling some of my consumer discretionary stocks to buy these cheap American manufacturers. Here are two I like.
American Railcar Industries (ARII) makes hopper, tank and other types of railcars in North America. I have been positive on this name since early December, when I profiled it on these pages. I continued to hold the stock, and even added a bit to my position during the quick pullback last week. Even though the shares have risen more than 40% since I profiled the company, the stock is still cheap, trading at less than 11x 2014's projected earnings.
American Railcar's consensus earnings estimates have been revised sharply upward for both 2013 and 2014 over the past month. If you listened to Warren Buffett yesterday on CNBC, going on about how much oil Burlington Northern is starting to haul (about 10% of the company's overall revenue), you'd have to be positive on the near- and medium-term prospects for tank-car manufacturers.
Parker Hannifin (PH), meanwhile, manufactures fluid power systems, electromechanical controls, and related components worldwide. It's not a sexy pick, but the company is one of the U.S.'s best manufacturers. It came through the financial crisis well, and it managed to print positive earnings even in those dark days. Consensus earnings estimates have ticked up over the last month for both fiscal 2013 (ending June) and 2014, and it is priced reasonably at 12.5x forward earnings. It also yields almost 2%.