Is Now the Time to Invest in Manufacturing Stocks?

June 17, 2011
Opportunities are in manufacturing sectors that can profit from emerging economies' demand for energy and food.

The U.S. economy is slowing down, and I see it expanding at an annual rate of about 2%.

Manufacturing has been the one bright spot, and I'll come back to that later.

The sluggishness over the past few months stems from the dramatic parts shortage caused by the crisis in Japan. This should ease over the next few months, as Japanese manufacturers come back online.

The European economy is even slower than the U.S. economy, due to the overhang of all the sovereign debt problems.

So far, yields on one-month LIBOR (London Interbank Offered Rate) have stayed relatively close to yields on one-month Treasuries.

This tells me that the central banks of Europe are backstopping the commercial banks. However, the German people are growing tired of supporting the also-rans.

Globally, the developing countries are bright spot, and they're still growing. Even though the economies in India, China and Brazil have cooled off, they continued to grow at a good clip.

Profiting on Oil Demand

The key question on investors' minds right now is, "What will happen in the Middle East"?

WTI prices shot up late last month, as did Brent crude. I believe this is based on fear of the unknown and that prices will slowly pull back.

However, I still believe that due to overall world demand, oil prices will stay around $100 a barrel in the first half of 2011.

Even at these elevated prices, we still think that the demand for oil will continue, and several investment ideas related to that demand include SeaDrill Ltd. (NYSE: SDRL), the Norwegian deep-water driller that has a high dividend; and Knightsbridge Tankers (NASDAQ: VLCCF), which transports oil and likewise offers a high dividend yield.

Buying Caterpillar and Joy Global

Back to U.S. manufacturing: I do see some investment opportunities here.

The earthquake and tsunami in Japan will slow production in the short run, but will add to the world's demand for coal, iron ore and liquefied natural gas. We are buying stocks that help produce these commodities, such as Caterpillar (NYSE: CAT) and Joy Global (NASDAQ: JOYG), which are both deeply involved in mining operations.

We also are buying Teekay LNG Partners (NYSE: TGP), which offers a high dividend, as well as the commodity trusts that gain from increased prices and increased shipments of coal -- Peabody Energy Corp. (NYSE: BTU) -- and iron ore -- Cliffs Natural Resources (NYSE: CLF).

Based on our views of the demand for all commodities (including agricultural commodities) over the next couple of years, we also are buying Penn Virginia Resources (NYSE: PVR), Freeport McMoran (NYSE: FCX), Southern Copper (NYSE: SCCO) and Deere & Co. (NYSE: DE).

We continue to like the natural-gas and liquids transporters such as Linn Energy (NASDAQ: LINE) and Kinder Morgan Partners (NYSE: KMP). These investments all pay relatively high dividends.

In other sectors of the economy, we like Honeywell (NYSE: HON), United Technology (NYSE: UTX) and Emerson Electric (NYSE: EMR).

We do not intend to let a market correction deter us from staying with producers that supply the developing world. I believe we are in a secular growth period for both hard and soft commodities.

Developing economies are consuming large quantities of better food and materials for economic expansion. In the last 10 years, 2 billion people worldwide have doubled their income. They seem to be steady in their demand for better housing, better food and a better life.

Ben Dickey, CFP, MBA, RIA, is founding principal of BSG&L Financial Services LLC. Based in New York City, he is a model manager for Covestor, an investment tool that enables individual investors to mirror the trades of professional investors. Dickey holds long positions in SDRL, VLCCF, CAT, JOYG, TGP, BTU, CLF, PVR, FCX, SCCO, DE, LINE, KMP, HON, UTX and EMR.

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