The multi-decade-high inflation in the United States had the biggest and most far-reaching impact on the manufacturing sector as the Federal Reserve was compelled to adopt an aggressive monetary tightening campaign that has seen interest rates soar by 525 basis points.

However, with inflation finally showing signs of easing and the Fed nearing the end of its interest rate hike campaign, the manufacturing sector finally appears to be making a rebound. Given this situation, investing in stocks like Lakeland Industries, Inc. (LAKE Quick QuoteLAKE - Free Report) , Chart Industries, Inc. (GTLS Quick QuoteGTLS - Free Report) , Caterpillar Inc. (CAT Quick QuoteCAT - Free Report) and Xerox Holdings Corporation (XRX Quick QuoteXRX - Free Report) will be a prudent choice.

Manufacturing Activity Expands  

Institute for Supply Management (ISM) Manufacturing PMI came up with a reading of 49% in September, 1.4% higher than 47.6% recorded in August, the Commerce Department reported. Manufacturing activity has contracted for 11 straight months after a 28-month period of growth.

Although a reading below 50 indicates contraction, manufacturing activity is on its way to recovery as three of the major subindexes have been expanding lately. Moreover, September’s reading is the highest since November 2022, indicating that manufacturing activity is expanding.

Manufacturing activity in September was driven by the construction of buildings and factories as production picked up and employment rebounded. Of the five subindexes that directly impact the Manufacturing PMI, the Production PMI came up with a reading of 52.5%, increasing 2.5% month over month in September.

The Employment Index came up with a reading of 51.2%, up 2.7% from August’s reading of 48.5%.

While the PMI readings over the past several months have reflected a contraction in the manufacturing sector, hard economic data shows recovery of the sector. Durable goods orders, which include goods lasting more than three years, increased a solid 4.2% year over year in August.

Also, the ISM’s forward-looking subindex for new orders climbed to 49.2% in September from 46.8% in August.

With new orders improving and the production index climbing, signs of a recovery are clear. Also, the Fed’s aggressive interest rate hike campaign is finally bearing fruit as inflation has more than halved from its peak of 9.1% in June 2022.

The Fed has increased interest rates by 525 basis points to take its benchmark rate to the range of 5.25-5.5%, which has been hurting the manufacturing sector. However, the central bank has indicated ending its monetary tightening campaign after another quarter percentage point hike. This definitely bodes well for the manufacturing sector.

Our Choices

Given this scenario, it will be prudent to invest in these four stocks with a favorable Zacks Rank that are poised to gain from expansion in manufacturing activity. We narrowed down our search to four such stocks. Each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Lakeland Industries, Inc. has five divisions and three wholly-owned subsidiaries: one large division of LAKE manufactures disposable/limited-use garments and the four smaller divisions. These include Chemland, which manufactures suits for use by toxic waste clean-up teams; Fireland Fyrepel Products, which manufactures fire and heat protective apparel and protective systems for personnel; Highland, which manufactures specialty safety and industrial work gloves and Uniland, which manufactures industrial and medical woven cloth garments.

Lakeland Industries’ expected earnings growth for the current year is 110%. The Zacks Consensus Estimate for current-year earnings has improved 12.9% over the past 60 days. LAKE presently sports a Zacks Rank #1.

Chart Industries, Inc. is a leading independent global manufacturer of highly engineered equipment servicing end-market applications in Energy, Industry, Life Sciences and Respiratory Healthcare with a unique business portfolio. GTLS’ equipment is used in the production, storage, distribution and end-use of atmospheric, hydrocarbon, and industrial gases.

Chart Industries’ expected earnings growth for the current year is 33.9%. The Zacks Consensus Estimate for current-year earnings has improved 4.8% over the past 60 days. GTLS presently has a Zacks Rank #2.

Caterpillar Inc. is the largest global construction and mining equipment manufacturer. Given that it serves a gamut of sectors — infrastructure, construction, mining, oil & gas and transportation, CAT is considered a bellwether of the global economy. Caterpillar has more than 4 million products with an extensive dealer network of 165 dealers spanning 191 countries.

Caterpillar’s expected earnings growth for the current year is 43.4%. The Zacks Consensus Estimate for current-year earnings has improved 10.5% over the past 60 days. CAT currently carries a Zacks Rank #2.

Xerox Holdings Corporation is a leader in the contractual print and document services market. XRX has developed one of the industry’s strongest portfolios of managed print service solutions and services. Xerox’s strategy is to use data-centric technologies to better help customers in their digital transformation journey, taking advantage of the changing market conditions.

Xerox’s expected earnings growth for the current year is 51.8%. The Zacks Consensus Estimate for current-year earnings has improved 3% over the past 60 days. XRX presently has a Zacks Rank #2.