The US-based Institute for Supply Management just issued a report of its purchasing managers index that was the highest it has been in nearly four years. The index reached 55.9% in December 2009 (it was 56.0% in April 2006); numbers above 50% indicate expansion in US manufacturing. Nine of 18 industries reported growth, including (in order) apparel, leather and allied products, petroleum and coal products, computer and electronic products, machinery, and electrical equipment.

Based on this report, The Wall Street Journal said the US economy is now growing quickly enough to avoid a double-dip recession. Such a recession happened in the early 1980s, when a brief recovery was followed by a recessionary downturn.

This is good news for the US economy in general, but also, of course, particularly for its manufacturing sector. This is why I decided to screen manufacturing companies to see which passed muster with the Guru Strategies I use to choose stocks. These are computerized strategies that I base on the investment tactics used by some of history's greatest stock market investors, such as Warren Buffett, Peter Lynch and Benjamin Graham.

A couple of the companies are not strictly manufacturers, but are conglomerates with large manufacturing operations. One is the doyen of conglomerates, General Electric (GE). It is moving away some of its non-manufacturing interests, particularly its NBC Universal television and film business, which it is in the process of selling 51% to cable television giant, Comcast. Left will be such business as the manufacture of wind and gas turbines, jet engines, light bulbs, appliances and electrical infrastructure products. A major non-manufacturing business remains, financial services, which is conducted through GE Capital, which has struggled during the economic turmoil of the past couple of years.

The Guru Strategy I base on the writings of James P. O'Shaughnessy thinks GE is worth buying. Variables in the company's favor: large market capitalization ($165 billion), cash flow per share that is well above the market's mean (GE's $2.16 versus the market's $0.49), huge number of shares outstanding (over 10 billion) and huge sales ($162 billion). Among the companies that pass all of these criteria, the strategy then selects the 50 with the highest dividend yield. With a yield of 2.59%, GE makes it into the top 50 of these companies.

Another conglomerate with a bevy of manufacturing businesses is Textron (TXT). Its product lines include Bell helicopters, Cessna aircraft, unmanned aircraft and armored vehicles, and E-Z-Go golf carts, among others.

The Guru Strategy I base on the approach popularized by the great investor, Benjamin Graham, thinks Textron's stock may well take off over the coming years. It likes that: Textron is neither a technology nor financial company; is large (sales in excess of $11 billion); is highly liquid, with current assets more than four times current liabilities; and has net current assets that exceed the company's long-term debt. These indicate the company is financially strong. Also important is the company's growth, and over the past 10 years, Textron's earnings per share have grown a strong 73.4%, while its stock's price is trading at a moderate price-to-earnings ratio of 7.6. All of these criteria indicate Textron is conservatively financially managed, while having a reasonably priced stock.

Joy Global (JOYG) is a favorite of my Peter Lynch-based strategy. The company manufactures and markets mining equipment used with coal, copper, oil sands, and other minerals. Lynch is best known for the P/E/G ratio, which places the P/E ratio relative to growth and is a way to measure how much the investor is paying for growth. The P/E/G should not be above 1.0 (1.0 means you are paying $1 for every 1% of growth) and below 0.5 is considered great. Joy is in the territory considered great, as its P/E/G is only 0.36. This is based on a P/E of 12.69 and a growth rate (based on the average of the three, four and five year historical EPS growth rates) of 35.1%. The Lynch strategy also likes that inventories have been falling relative to sales (management is doing a good job managing inventories) and debt, while not low, is moderate (66.8% of equity).

The last manufacturer I want to report on is the Dresser-Rand Group (DRC), which manufactures compression equipment and steam turbines used in the production, transmission, refining and processing of oil and natural gas. Joel Greenblatt's strategy is the one that likes Dresser-Rand. This strategy only uses two variables. One is earnings yield, calculated by dividing a company's earnings before interest and taxes by its enterprise value, and the other is return on total capital, which is a way of looking at how a company uses the capital it employs. This strategy ranks each of these from among all the thousands of stocks in my website's (Validea.com) database. Measured by earnings yield, Dresser-Rand ranks 78th, and by return on total capital, ranks 64th. Then the strategy combines these rankings to see where the stock comes out among all stocks in the database. Dresser-Rand is ranked 14th. That's impressive and illustrates why the Greenblatt strategy likes this stock so much.

The prospects for manufacturing are improving, and all of these companies are heavily involved with various types of manufacturing. They have reasonably priced stocks and are financially well run. Manufacturing should be in your investment portfolio, and any of these four companies will fit the bill.

Published by Globes [online], Israel business news - www.globes-online.com - on January 14, 2010