Making trouble

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7 Stocks to Sell Amid Dark Manufacturing Outlook

Caterpillar (NYSE:CAT) has had a rough year. The stock is down 13% since May 2012 while the S&P 500 has tacked on 16% in the same period, and more recently is down slightly YTD in 2013 while the broader stock market continues to set new highs.

What gives?

A manufacturing malaise worldwide, that’s what.

On May 1, the Institute for Supply Management released its April manufacturing report for the U.S. And while the numbers still indicate expansion, the 50.7 reading is the lowest of the year — and dangerously close to contraction, since the threshold for growth is a reading above 50.

Anecdotes from ISM survey respondents paint an equally troublesome picture. Take a look at these quotes from select respondents:

  • “Business can be described as flat at best.” (Food, Beverage & Tobacco Products)
  • “Market has slowed this month — weather in some parts of the country, also customers built inventory in anticipation of building increase, but the economy is still slow to pick up this spring.” (Wood Products)
  • “Overall, volume is steady or slightly declining. Q1 sales volume is lower than projected.” (Chemical Products)

It’s not just the U.S. seeing weakness, either. The monthly PMI report from HSBC last week indicated manufacturing weakness in China, showing the region’s momentum is waning and dangerously close to a manufacturing decline. The reading was just 50.4 and, like ISM figures, any number over 50 signals expansion while below 50 signals contraction. Equally disturbing is that China PMI was down significantly from 51.6 in March, and new export orders declined for the first time this year.

chinapmi

And to top it off, Germany’s manufacturing recently saw a surprise slowdown, too.

This kind of environment is obviously difficult for manufacturing companies like Caterpillar … and unfortunately, there’s not a whole lot they can do to change things. That’s because CAT is one of many cyclical manufacturing stocks that rise and fall based on the tides of the global economy and not necessarily because of the firm’s products or management.

More construction activity means more demand (and thus more sales and profits) for Caterpillar’s heavy machinery; less demand means lower sales and profits. We are stuck in the latter situation of less demand, and there’s nothing that CAT can do about it — or, for that matter, other major manufacturers that include:

  • Mining equipment giant Joy Global (NYSE:JOY), down 14% YTD vs. a 13% run for the S&P 500 since Jan. 1.
  • Agricultural equipment stock Titan Machinery (NASDAQ:TITN), down 7% YTD.
  • Engine and power systems manufacturer Cummins (NYSE:CMI), up just 2% YTD.

Then, of course, there are the materials stocks that provide raw materials to these manufacturers. They have been hit just as hard and include:

  • U.S. Steel (NYSE:X), down 24% YTD.
  • Southern Copper (NYSE:SCCO), down 10% YTD.
  • Aluminum giant Alcoa (NYSE:AA), down 1% YTD.

All of these plays are likely to remain soft amid a manufacturing downturn. And while front-running the plays might get you first in line for the economic recovery, the sad reality is that recent data doesn’t point to that recovery sticking any time soon.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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