THE STREET ANALYSTS

The ISM released their monthly PMI report on business for the manufacturing sector yesterday. PMI came in at 60.7% (2% pts higher than the November PMI), which is a great number and indicates a very strong expansion in the economy. Due to this, I'm extremely bullish on the S&P.

 

The US economy seems to be recovering well, and investors are now risk-on. The sectors reporting the largest growth (according to the ISM Report on Business) in the manufacturing sector are Apparel, Leather & Allied Products; Furniture & Related Products; Wood Products; Fabricated Metal Products; Machinery; Computer & Electronic Products; Transportation Equipment.

 

These sectors should perform well in the coming months, so I'll be looking to make a few buys here. Caterpillar is the world’s largest construction manufacturer, and confidence coming back into the construction sector and the machinery production sector, we could see a lot of investors move their money into Caterpillar. Caterpillar has a solid ROE of 22% and a healthy operating margin of about 11%. Caterpillar has a debt to equity ratio of 1.5, which I don’t mind, the leverage is safe, in fact with the confidence coming out of the Report on Business, I think it’ll aid rather than hinder Caterpillar, but we will probably see more volatility with Caterpillar (greater returns?).

 

In the apparel sector are of course Nike. Nike has been on a very strong and steady bull run over the past 9 months, and with consumer confidence becoming stronger, I expect Nike to perform well. They also have a great return on equity at 28%, with a decent operating margin of 10%. Nike is a more stable company than Caterpillar and is much less volatile, but I think this would be a good addition to my medium-term portfolio to maybe make 7-10% (un-leveraged). 

 

US Steel Corp does business within the fabricated metal products sector. US Steel Corp has not been performing well, even before the pandemic. However, the economic conditions will greatly benefit US Steel Corp and I expect they will make a recovery due to the confidence of the sector, and the upward trajectory of commodity prices post-pandemic.

 

US Steel Corp has jumped 18% since the ISM Report. This is not because of the report, but instead because investors are betting on a Biden controlled Congress which would make a wide-ranged infrastructure stimulus bill likely. This would greatly benefit steelmakers, such as US Steel, and construction machinery manufacturers such as Caterpillar. We might see some volatility because of this, and I would like price to settle down before I enter these 2 stocks. Both stocks have broken consolidation, albeit in such a strong move, that its best I wait for some profit-taking before entering. However, the US Steel move might be killed already.

 

I will be taking a position in Nike though, it seems like the stock is moving up and out of a recent few days of consolidation.