Sectors: Generating Ideas PMI, February 2017
Big Hedge Funds and Banks have an army of analysts, this allows then to fully research and understand every single stock in the world. But smaller Funds or Retail Traders do not have this infrastructure. So we need to take short-cuts, use some tricks.One of the best happens to be ISM PMI and NMI reports. It doesn’t only give us information about the economy but it actually breaks it into every single sector the survey. For every part, if the indicator (New orders, Employment, Production, etc.) it will tell you which industries are doing better or worse. This way you can actually get an initial idea about which sectors might overperform or underperform in the next months.The other bit of information that these reports provide is “industry commentaries”. Which give you a glance of what the businessmen inside those sectors think. Reading this between the lines is a good way to generate ideas about which sectors is worth to investigate deeper.
- Industry commentaries
If we read February 2017 report for PMI on ISM website we can find the section that is titled “What respondents are saying…” Let me pick a couple of examples that I believe show a lot of strength.“Very positive outlook for this quarter, production goals have been adjusted multiple times and increased each time due to demand.” (Computer and Electronic Products)
There is not need to be a genius in order to understand what is been said here: ” We are making more money than what we thought we were going to make. We will beat expectations.” Let’s take note of this sectors and look at another example now.“Sales and business continue to be strong and increasing.” (Machinery)
Again this seems to be quite interesting, these guys suggest that they are doing very well and they expect to do even better. Let’s look at a final example that I think it’s quite interesting.
“Bookings are heavy early in the season. Expect robust first half of the year.” (Primary metals)
“Major focus on commodities and potential [for] further inflation.” (Electrical Equipment, Appliances & Components)
So the guys in primary metals suggest that they are getting lots of new orders, they expect the next 6 months to be good. And the guys in Electrical, are concerned about inflation on commodities. This could be good for the right companies at the right part of the value chain. I think it’s worth taking a look into primary metals companies that could benefit from this inflation in commodities. Heavy bookings + Increasing Price, this could be good for someone out there.
- Inside PMI
The report tells us which industries are reporting higher in overall PMI and in the other subparts of the indicator. So what I’m going to do now is see which are those doing better and worse. And see if I can keep building towards a final idea about which sector might be quite strong or quite weak.The top 5 performing sectors in PMI are Textile Mills; Apparel, Leather & Allied Products; Machinery; Compter & Electronic Products; Primary Metals. Which is quite interesting for two reasons. First 3 of the two sectors that we just talked about appearing here, good news. Secondly, we have two new sectors that look interesting, Textile Mills and Apparel, Leather & Allied Products. Both very cyclical, basically related to the discretionary consumer.
If we now check New Orders we can see that out of this 5, for of them appear again, Textile Mills falls off. So, in my opinion, we should discard Textile Mills and focus on the other 4. Also, it’s important to notice that both Chemicals and Wood Products appear quite strong in here. So we might want to take note of them and keep a close eye on how they evolve in the following months.
Now I’d like to check production, this allows us to understand if these companies are already increasing their level of production according to their new orders, or if they are still lacking on that. At the end of the day if they don’t manage to produce they won’t really beat any expectations. Here Textile Mills appear quite high, this makes me think they might have been quite strong in the past months (hence why the high PMI) but might not be as strong in the coming months (lacking new orders). By contrast, Computer sector tells the opposite story, high new orders lacking production, so it might be too early for them.
However, Apparel, Machinery and Primary metals have a very good production. Good PMI backed with good new orders and production, means they are very interesting investment options. We don’t only expect them to be strong in the future, but the future might actually be very close.
After going through the sector data on the PMI report, we can conclude that there are 3 industries that look quite interesting. These are: Apparel, Leather and Allied Products; Machinery and Primary Metals. I believe is worth it to try and dig into this industries trying to map the value chain and find good stocks to trade.Two other interesting sectors would be Textile Mills, which look very interesting but it might be too late to join the party. And Chemicals, which also look interesting but just not as much.Finally, Computers and Electrical Equipment look very interesting. New orders and very high but production are still not getting there. I believe it would be best to keep a close eye on this one and see how it evolves in the following months.
Nuño Pérez del Barrio
Note*: You can find all PMI reports at ISM website, HERE.