May 2020 PMI: The Good News
- Though the May 2020 PMI number looks like good news, several key sub-indices have contracted or slowed.
- But a handful of sectors have started expanding despite the COVID-19 disruption.
- Investors can track stocks in these outperforming sectors to latch onto winning trades.
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The good news is there's no devil. The bad news is there's no heaven. There's nothing. - Kerry Packer
On May 24, 2020, a week before the PMI numbers were released, I had reported in The Lead-Lag Report that the number would see a bounce and that a bottom was in place.
Well, the May 2020 PMI came in at 43.1%, up from the April number of 41.5%. While this does not imply we are out of the woods, it does indicate that demand for a certain class of manufactured goods is witnessing an uptick. And remember, all sectors are not expanding - many are contracting, but we should focus on the good news, extract the winners out of the pack and latch onto winning trades.
Here's a list of the manufacturing sectors that are doing well:
1. Computer and Electronic Products: People are afraid of the virus and most would rather work from home - or self-quarantine and entertain themselves at home. Work-at-home has become the new normal, as the virus is still on the loose. Plus, people now prefer online shopping, and that's made eCommerce sales jump 49% in April 2020 as compared to April 2019. Sales of almost all types of consumer electronics have shot up since March 2020 - radios, TVs, computer accessories, monitors, you name it.
Source: Criteo Coronavirus Impact Dashboard
Students and office workers have no option but to create a home office so that they can study online or work from home. Then comes entertainment - many people are still hesitant to visit theme parks and movie theaters, or travel for a holiday, and therefore, the demand for home entertainment is growing at a fast clip.
That said, the spike in demand for hardware can taper off and the demand for consumables should rise. It is, therefore, possible that computer and electronic product sales will start stagnating in the coming PMI numbers.
Investors can take a clue from the data and consider chasing software (cloud, SaaS) and entertainment (music, movies, streaming media) stocks instead of running behind hardware stocks.
2. Food, Beverages & Tobacco Products: The food business has been on a roll ever since the stay-at-home/work-from-home orders kicked in. People stocked up on food and beverages (and tobacco products), and sales spiked in March 2020.
Image Source: Criteo Coronavirus Impact Dashboard
Sauces, seasonings, nut butters, marinades, energy drinks, comfort foods, etc., everything flew off the shelves. However, the curve is now declining though the sales are higher than the March 2020 number.
I would rather keep my eyes open for stocks in the plant-based and unprocessed food sector because the eating habits of many folks may change. Grocery chains that make wholesome foods and supply at the local level should do well going forward.
3. Home & Garden and Outdoor Furniture
The numbers for these segments got hidden in the PMI data categorization. Self-quarantined people discovered a passion for gardening and hanging out in the open, thereby bumping up sales of companies that make watering cans, spa and pool filters, hammocks, bird feeders, and stuff like that - you get the drift. Perhaps, it was the demand for these niche products that led the charge in the consumable plastics segment.
Image Source: Criteo Coronavirus Impact Dashboard
If the virus disruption prolongs, companies making outdoor and gardening stuff will do great. Perhaps people may start growing vegetables and other stuff at home, so you also can look at hydroponic equipment manufacturers with one eye and keep the other eye on the disruption.
4. Petroleum & Coal
There was a pick-up in petroleum and coal, but I wouldn't pay too much attention to it because the demand is linked to the states reopening. Going forward, demand for fossil fuels may rise, but there is a glut in the market - as reflected in shutting down by many shale oil producers. Saudi Arabia and other countries had to slash production to sustain prices. I would give this segment a complete miss.
Though there's some good news in May 2020's manufacturing PMI, and June and July may report even more robust numbers, don't get carried away because the economy's not out of the woods yet. Demand, New Orders, Backlog of Orders, and other key indices have contracted or slowed down.
Image Source: ISM Website
Our nation is engulfed with protests, COVID-19, and states reopening in the middle of a pandemic. We may get hit by a second COVID-19 wave, and that could be very bad news for the economy. So, if the analysis above made you feel bullish, just remember that it is valid for the near term.
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