Utilities, Autos Power Industrial Production: 5 Top Picks

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Industrial production increased for the third successive month in August, per data from the Federal Reserve. A jump in utility output and robust motor vehicle production were the primary catalysts to the month's gains. Following this report, industrial production seems to be on track to register its best annual growth numbers since 2010.

Some analysts have pointed to the fact that growth in industrial production declined in the last two months. They believe that a strong dollar and trade tensions with China are inhibiting the growth of U.S. factories.

However, other indicators, such as the ISM manufacturing index indicate that the sector is in fine fettle. Investing in utility and auto stocks, which largely powered last month's growth, looks like a smart option at this point.

Utilities, Autos Power August's Gains

Industrial production, a gauge of mining, utility and factory output, increased at a seasonally adjusted pace of 0.4% in August. This is marginally higher than the estimated level of 0.3%. Utilities output advanced 1.2%, acting as one of the primary catalysts for the increase in overall output. Warmer temperatures led to a step up in electricity usage and consequently, production.

Meanwhile, a 4% increase in motor vehicles and parts production was solely responsible for the 0.2% increase in manufacturing output. In August, U.S. automakers assembled vehicles at an annual rate of 11.5 million units, the sharpest pace since April. Mining output increased 0.7% in August.

Can Stronger Dollar, Trade Tensions Impede Future Gains?

Over the past 12 months, industrial production has increased by 4.9%. The metric is now on track to register its best annual increase since 2010. That year, industrial production increased 5.5% as the economy started to recover from the Great Recession. In August, capacity utilization increased from 77.9% to 78.1%.

Despite August's favorable reading, a section of economists point to the fact that factory production has declined over the past two months. Trade tensions with various countries may have impeded growth. However, others believe that Trump's protectionist stance is actually aiding U.S. manufacturers.

Michael Pierce of economic research firm Capital Economics thinks that the decline in factory output can be attributed to an 8% increase in the value of the U.S. dollar since April. However, other indicators of manufacturing remain upbeat. The ISM manufacturing index surged to a 14-year high in August on strong domestic and foreign demand.

Our Choices

August's upbeat reading of industrial production numbers indicate that U.S. factories are chugging along at a robust pace. Despite headwinds such as a strong dollar and trade tensions, the metric looks set to remain robust in the months ahead.

Notably, prior to the release of the report, Nomura's chief U.S. economist Lewis Alexander had said that despite the slowdown in external growth, "strong domestic demand will likely remain supportive for industrial activity expansion."

Investing in utility and auto stocks, which were at the forefront of August's gains looks like a prudent move at this time. We have narrowed down our search based on a Zacks Rank #1 (Strong Buy) and other relevant metrics. You can see the complete list of today's Zacks #1 Rank stocks here.

NRG Energy, Inc. NRG is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers in major competitive power markets in the United States.

NRG Energy's projected growth for the current year is more than 100%. Its earnings estimate for the current year has improved by 14% over the last 60 days.

Middlesex Water Company MSEX is an owner and operator of regulated water utility and wastewater systems.

Middlesex Water's projected growth for the current year is 33.3%. Its earnings estimate for the current year has improved by 17.9% over the last 60 days.

Allison Transmission Holdings, Inc.  ALSN is a designer and manufacturer of fully-automatic transmissions for commercial and defense vehicles.

Allison Transmission Holdings' projected growth for the current year is 66.7%. Its earnings estimate for the current year has improved by 11.3% over the last 60 days.

Meritor, Inc. MTOR is a global automotive parts manufacturer and supplier.

Meritor's projected growth for the current year is 57.5%. Its earnings estimate for the current year has improved by 5.7% over the last 60 days.

Fox Factory Holding Corp. FOXF is a designer, manufacturer and marketer of ride dynamics products on a global basis.  

Fox Factory Holding's projected growth for the current year is 31.7%. Its earnings estimate for the current year has improved by 14.2% over the last 60 days.

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NRG Energy, Inc. (NRG): Free Stock Analysis Report

Middlesex Water Company (MSEX): Free Stock Analysis Report

Fox Factory Holding Corp. (FOXF): Free Stock Analysis Report

Allison Transmission Holdings, Inc. (ALSN): Free Stock Analysis Report

Meritor, Inc. (MTOR): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Symbols: NRG , MSEX , FOXF , ALSN , MTOR

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