With major indexes slowing down in the first few days of September, there is a certain amount of pessimism in the air.

This is partly because of a kind of superstition that September will be a bad time for stocks, supported by reasons ranging from vacationing investors resuming trade to mutual funds closing losing positions before their year ends. But as has been seen in the case of the S&P 500, over a 25-year period, the average return for the month is -0.4%, with the median return being positive.

This year, it’s a lot more complicated. For one thing, the spread of the Delta variant is not something to be denied and our biggest fears appear to be coming true going by the regional bank reports that are consolidated into the Fed’s Beige Book. After all, nobody likes to hear that “economic growth downshifted slightly to a moderate pace,” even if it’s only from July through August and even if it’s mainly because of pullback in specific segments like dining out, travel and tourism.

The other contributing factors are not really negative when read in the context of the reality of the economic recovery.

Let’s take the auto sector first. The main problem here is the shortage of chips, which is a key component of modern-day vehicles. When production halts because of one (or a type of) component, inventories of other components and semi-finished products automatically climb because supply of other items are not that constrained.

At the same time, demand continues to build, leading to pricing strength (which may not be wonderful for automakers, but it certainly would be for dealers). It’s understood that when chip supply increases, these semi-finished products will hit the market in record time.

So it all boils down to the chip shortage, which has resulted not because we have fewer chips being manufactured. It’s because of the digital revolution that was exacerbated by the pandemic. No amount of retooling, efficiency enhancements and even capacity expansions can make up for the volume of chips that were re-applied to other sectors of the economy. And real capacity additions that can fill the gap take years to build and can be much for expensive to maintain when the goal is to build them in the U.S.

There’s also the question of a skills gap and the availability of a market for more expensive and not necessarily more cutting-edge chips. The U.S. chip industry could get $52 billion in tax breaks, research funding and incentives through 2027 by way of the CHIPS Act, if it goes by the House and Biden.

Meanwhile, semiconductor manufacturers are on track to begin construction on 19 new high-volume fabs by the end of this year (six of these will be in the Americas) and break ground on another 10 in 2022. The bottom line is that these things take time.

So the takeaway is that chip production has been diverted to other sectors and they will support growth in those sectors. Auto demand is not going away, it will join in later, ensuring that the recovery has a long tail.

Another sector with significant issues is construction. Land and labor constraints are a pressure on construction activity, which is leading to lower inventories, and therefore, lower sales. But the Beige Book says that residential construction was actually up slightly, while nonresidential construction picked up modestly.

Importantly, despite concerns about supply disruptions and resource constraints, “businesses in most Districts remained optimistic about near-term prospects,” according to the Beige Book.

Resource constraints obviously refers primarily to labor, where we are now seeing what appears to be an anomaly. Despite the concerns in customer-facing markets like restaurants, travel, etc., the weekly jobless claims data shows continued declines from its January peak to 310,000 last week.

Moreover, the unemployment rate for August dropped to 5.2% in August, its lowest level since March 2020 when the pandemic first hit. So it appears that employers are retaining employees in anticipation of a faster reversal than we had last year, as well as the overall labor shortage. And if people have their jobs, they retain their buying power, which in turn, helps the economy.

This optimism is also reflected in the latest ISM report for manufacturing where we find not just the overall indicator of the manufacturing PMI, which was 59.9% in August (a 0.4% increase from July’s 59.5%) but also a lot of other insights.

One thing that comes across strongly is the rising demand levels that most of the 17 manufacturing industries are struggling to meet. There’s an outline of the top reasons for this: number one is labor shortage (resurgent infections are leading to lower applications, labor turnover is high due to better opportunities); number two is raw material supply constraints, including of imported inputs (impacted among other things by COVID-related shutdowns in Southeast Asia) and consequent price increases, although the situation has improved from July; number three is transportation bottlenecks, port congestion in China and container shortages leading to rising transportation costs.

Overall, 15 of the manufacturing industries grew in August, with the top six (Computer & Electronic Products; Fabricated Metal Products; Chemical Products; Food, Beverage & Tobacco Products; Transportation Equipment; and Petroleum & Coal Products, in that order) reporting moderate to strong growth.

The reading for the overall economy as well as the manufacturing sector based on a 15-month trend in both cases, is growth at a faster rate.

Given all of the above, there is reason to be decidedly positive on stocks as we enter the most exciting holiday quarter. Here’s a quick look into a few of my favs-

Titan Machinery Inc. (TITN Quick QuoteTITN - Free Report)

This owner of agricultural and construction equipment stores in the upper Midwest region has a Zacks Rank #1 and Value, Growth and Momentum Scores of A.

The stock belongs to the Automotive - Retail and Whole Sales industry, which is at the top 2% of Zacks-classified industries. But its current strength is not attributable to the dynamics of the passenger car market. Rather, it comes from the company’s exposure to the strong construction market as well as the relatively steady food production segment of agriculture.  

Its revenues are expected to grow 15.0% in the year ending in Jan 2022 and 8.4% the following year. Its earnings are expected to grow 54.8% this year and 25.6% in the next. The current year estimate is up 17 cents (9.6%) in the last 30 days. The estimate for the following year is up 25 cents (11.4%).

ArcBest Corp. (ARCB Quick QuoteARCB - Free Report)

The trucking company is ranked #1 (Strong Buy) by Zacks with Value, Growth and Momentum Scores of A, B and A, respectively. The reasons are clear from the above discussion and are reflected in the numbers:

Revenue and earnings are expected to grow a respective 23.1% and 94.4% this year and a respective 4.5% and 1.2% in the next (estimates usually go higher over time). The estimate revisions trend shows consistent increases. In the last 30 days, the 2021 estimate went up 44 cents (7.5%) while the 2022 estimates jumped 33 cents (5.5%).

ArcBest belongs to the Transportation - Truck industry, which is at the top 14% of Zacks-classified industries.

MI Homes, Inc. (MHO Quick QuoteMHO - Free Report)

This homebuilder’s focus is on the extremely attractive single-family housing segment, where there are particularly low inventories and where it caters to the entire range of buyers including first-time, move-up, luxury and empty nesters.

The Building Products - Home Builders industry to which it belongs, is currently in the top 20% if Zacks-ranked industries.

The Zacks Rank #1 stock has Value, Growth and Momentum Scores of A, C and A, respectively.

The lone analyst providing estimates on this stock sees its 2021 revenue and earnings rising 24.5% and 63.3% this year. Growth in 2022 is expected to be 6.9% and 8.0%, respectively. In the last 30 days, the Zacks Consensus Estimate for 2021 has jumped $3.39, or 32.5%. the estimate for 2022 has jumped $2.72, or 22.3%.

Genesco Inc. (GCO Quick QuoteGCO - Free Report)

This specialty retailer of footwear, headwear and accessories has a Zacks #1 rank with Value, Growth and Momentum Scores of B, C and A respectively.

It belongs to the Retail - Apparel and Shoes industry (top 13%), which should benefit from both the reopening and the upcoming holiday season.

Its revenue and earnings are expected to grow 33.3% and 589.0% in the year ending in Jan 2022. The following year they are expected to grow 3.5% and 4.5%, respectively.

The Zacks Consensus Estimate for the current year is up $1.02 (21.5%) in the last seven days, the estimate for 2023 is up 80 cents (15.3%).

Oxford Industries, Inc. (OXM Quick QuoteOXM - Free Report)

The apparel company has a Zacks Rank #1 as well as Value, Growth and Momentum Scores of C, A and A, respectively.

A member of the Textile - Apparel industry (top 5%), the company is well-positioned to make the most of the reopening, as well as the holiday season.

It is expected to grow revenue and earnings 47.4% and 469.1%, respectively, in the year ending Jan 22. In the following year, revenue and earnings are expected to grow 2.5% and 4.1%, respectively. The current year’s estimate has jumped $1.58 (31.0%) in the last 30 days. The estimate for next year is up $1.28 (22.6%).

One-Month Price Performance

Image Source: Zacks Investment Research