Best supply chain stocks to invest in now stand out in the currently struggling manufacturing sector due to their potential to produce profitable returns.
The manufacturing sector has been enduring a rough patch in 2022, amid high inflation, inventory bottlenecks due to transportation snags, muted demand and supply chain problems. However, recent data has shown that this may be in the past.
Continue reading to discover the best supply chain stocks to invest in now.
Supply Chain Sector Outlook
According to the Institute for Supply Management, economic activity in the manufacturing sector grew in September and registered a Purchasing Managers’ Index (PMI) reading of 50.9%. A PMI reading above 50 represents an expansion when compared with the previous month.
Furthermore, the Production Index increased 0.2% month over month in September to record a reading of 50.6%. The production index measures the changes in volume of output and activity at the end of each month.
According to McKinsey & Company, the U.S. manufacturing sector accounts for $2.3 trillion, or roughly 11% of the country’s gross domestic product (GDP). McKinsey analysts suggest that reviving the growth in the manufacturing sector can potentially create 1.5 million jobs and grow the GDP of the United States by 15% by 2030.
Moreover, government efforts, such as the Bipartisan Infrastructure Law, are expected to restore the strength of the manufacturing industry and drive a manufacturing revival. With a resurgence in the manufacturing sector underway, investors should start positioning their portfolios for a rebound.
Best Supply Chain Stocks to Invest In: Emerson Electric Co. (NYSE: EMR)
Emerson Electric Co. (NYSE: EMR) is a global technology and engineering company, which provides innovative solutions for customers in industrial, commercial and residential markets. It operates through the following business segments: Automation Solutions, Climate Technologies, and Tools and Home Products.
A review of Emerson’s sum-of-the-parts (SOTP) value reveals that a breakup could unlock further shareholder value. Sum-of-the-parts valuation is a process of valuing a company by determining what its aggregate divisions would be worth if they were spun off or acquired by another company.
Furthermore, Emerson Electric is the undisputed powerhouse in process automation with the industry’s largest installed base in the Americas. Despite headwinds in fiscal 2020 given low levels of gross fixed investment amid geopolitical uncertainty and COVID-19-related disruptions, Emerson is poised for several years of positive organic growth.
At the end of the second quarter of 2022, 47 hedge funds disclosed ownership of stakes in Emerson Electric Co. This is compared to 45 positions in the previous quarter. This further indicates that Emerson is a buy in the current market.
As of Oct. 16, the stock has a trailing 12-month price-to-earnings (P/E) ratio of 14.77 and is offering a forward dividend yield of 2.66%. Emerson Electric Co. is one of the best manufacturing stocks to buy now and is currently trading at a bargain.
Best Supply Chain Stocks to Invest In: Deere & Company (NYSE: DE)
Deere & Company (NYSE: DE) is a major manufacturer of machinery and equipment for the agriculture and construction industries.
Deere has three main segments. 1) The company’s production and precision agriculture segment manufactures global equipment and technology solutions for production-scale growers. 2) The small agriculture and turf segment develops equipment for dairy and livestock producers, crop producers, and turf and utility customers. 3) Finally, the construction and forestry segment makes a range of machines for the earthmoving, forestry and roadbuilding production systems.
Deere sells an “ongoing relationship” to farmers, as every piece of equipment purchased leads to a steady supply of future parts and related services. The true source of Deere’s competitive advantage is the company’s dealership network and its ability and willingness to finance the purchase of its equipment for farmers.
The unique nature of its distribution system and the credit decisions that are made at the distributor level have created a structure that has allowed the company to keep credit losses to extremely low levels.
Hence, Deere has generated returns on equity (ROE) of over 20% and in many years well above 30%, for more than two decades. Return on equity shows how well a company is in generating returns on the investment it receives from its shareholders. ROE is also a gauge of a corporation’s profitability and Deere has a healthy history in this category.
Plus, 54 hedge funds are long in Deere & Company (NYSE: DE) and hold stakes worth $1.58 billion in the company. Of those, First Eagle Investment Management is the top shareholder in the company and held stakes worth $294.7 million. This goes to further show how Deere is a great company to invest in now.
Best Supply Chain Stocks to Invest In: Caterpillar Inc. (NYSE: CAT)
Caterpillar Inc. (NYSE: CAT) manufactures and markets construction and mining equipment worldwide.
Caterpillar Inc. is expected to continue to be the leader in the global machinery market, providing customers an extensive product line. For nearly a century, the company has been a trusted manufacturer of mission-critical heavy machinery, which has led to its position as one of the world’s most valuable brands.
The company’s strategy focuses on employing operational excellence in its production process, expanding customer offerings and providing value-added services to customers. Since 2014, Caterpillar has taken steps to reduce structural costs and its fixed asset base by implementing cost management initiatives and by either closing or consolidating numerous facilities, reducing its manufacturing floor space considerably.
Over the past decade, the company has continually released new products and upgraded existing modeling to drive greater machine efficiency. In fact, Caterpillar announced it will unveil four electric machine and battery prototypes at the bauma trade fair 2022 in Munich, Germany.
Customers also rely on the services that Caterpillar provides, such as machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed.
Caterpillar has exposure to end markets that have attractive tailwinds. On the construction side, the company will benefit from the $1.2 trillion infrastructure deal in the United States. The country’s road conditions are in poor condition, which has led to suppressed road construction demand.
In energy, the improvement in the price of oil since the COVID-19 lows will encourage exploration and production companies to increase oil and gas capital expenditures, leading to growing sales of Caterpillar’s oil-well-servicing products.
Recent share price weakness provides an opportunity for investors to add to their large-cap investment portfolio at an attractive discount to many experts’ estimate of intrinsic value. This would be a great investment in today’s market.
Best Supply Chain Stocks to Invest In: The Bottom Line
Although the manufacturing sector has been hammered by high inflation and supply chain issues, there are still investment opportunities that can turn a profit. Emerson Electric (NYSE: EMR), Deere (NYSE: DE) and Caterpillar (NYSE: CAT) are large companies that have a proven track record of getting through difficult times. With the supply chain outlook becoming more positive, it is a great time to start investing.
Adam Johnson writes for www.stockinvestor.com.
