The Truth Hurts: The Real Reason American Manufacturing Is in Trouble

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According to Carl Pope, a former chairman of the Sierra Club, manufacturing jobs aren't leaving America because of high wages -- they're leaving because the government has made it ridiculous to stay.

Pope argues that Germany and Japan, both successful and high-end manufacturing economies also deal with high wages, regulations or union laws. The difference between what makes these foreign manufacturing economies successful has to do with government support.

Government support
"A growing number of public officials, such as former Pennsylvania Governor Ed Rendell, have come to see manufacturing as the key to economic revival and jobs," reports Pope (via Bloomberg).

Still, the U.S. government is downright hostile to manufacturing -- companies must maneuver unfavorable tax policies, varying state-by-state regulations, infrastructure, and permits, and the high cost burden of health care, to name a few.

Consider pensions and retiree health care, something Pope explains many foreign societies take care of. But in the U.S., manufacturing companies "have carried these costs like a ball and chain."

"We are not victims of an impersonal Leviathan called 'globalization.' We're the suckers who allowed our government to sacrifice the manufacturing sector while protecting the real winners: commodities, intellectual property, finance and agribusiness. The U.S. didn't lose its manufacturing leadership; it threw it away."

Consider this example: "The refusal of Congress to pass long-term funding for rebuilding U.S. roads, bridges and transit systems will only accelerate [the manufacturing] decline. Meanwhile, Korea, Japan and China continue to invest in high-speed rail, advanced automotive batteries and other strategic infrastructure."

To bring back manufacturing, Pope argues we need tax help, increased public spending, and long-term government commitments to improve infrastructure and offer subsides where needed.

The future for manufacturing companies, in the U.S. and abroad, is never certain. Labor and tax laws are constantly adjusting to increasing standards of living around the world, and profit margins can take a hit before companies have time to react. After all, factories are hardly mobile.

Another factor impacting the profit margins of manufacturing companies is the access to cheap resource materials. Commodity prices are volatile, but largely on the rise. And one new regulation, such as an environmental protection law, can halt a manufacturing company in its tracks.

Business section: Investing ideas
With that overview of the industry out of the way, let's now pivot to investing. We examined whether there are any manufacturing or machinery stocks being targeted by bearish investors.

For ideas, we collected data on institutional money flows and identified 10 large machinery stocks that have seen significant institutional selling during the current quarter.

Big money managers have extensive resources to analyze investing ideas. So, if they're dumping a certain stock, it's worth paying close attention.

Sophisticated investors, like hedge fund and mutual fund managers, think these manufacturing stocks are in trouble -- do you agree? Or is this excessive pessimism a contrarian buy signal?

List sorted by market cap. (Click here to access free, interactive tools to analyze these ideas.)

1. Illinois Tool Works (NYS: ITW) : Illinois Tool Works manufactures a range of industrial products and equipment worldwide. Net institutional sales in the current quarter at -21.5M shares, which represents about 4.79% of the company's float of 448.62M shares.

2. Ingersoll-Rand (NYS: IR) : Engages in the design, manufacture, sale, and service of a portfolio of industrial and commercial products in the United States and internationally. Net institutional sales in the current quarter at -11.1M shares, which represents about 3.56% of the company's float of 311.76M shares.

3. Dresser-Rand Group (NYS: DRC) : Engages in the design, manufacture, sale, and servicing of centrifugal and reciprocating compressors, gas and steam turbines, gas expanders, and associated control panels primarily to the oil, gas, chemical, petrochemical, process, power, military, and other industries worldwide. Net institutional sales in the current quarter at -5.0M shares, which represents about 6.71% of the company's float of 74.56M shares.

4. SPX: Provides flow technology products, test and measurement products, thermal equipment and services, and industrial products and services worldwide. Net institutional sales in the current quarter at -1.6M shares, which represents about 3.24% of the company's float of 49.42M shares.

5. Avery Dennison (NYS: AVY) : Produces pressure-sensitive materials, office products, tickets, tags, labels, and other converted products. Net institutional sales in the current quarter at -6.6M shares, which represents about 6.24% of the company's float of 105.79M shares.

6. Nordson: Nordson Corporation manufactures equipment used for precision dispensing, testing and inspection, and surface preparation and curing. Net institutional sales in the current quarter at -1.8M shares, which represents about 3.38% of the company's float of 53.18M shares.

7. Sauer-Danfoss: Designs, manufactures, and markets hydraulic, electronic, and mechanical components, as well as software and integrated systems that generate, transmit, and control power in mobile equipment. Net institutional sales in the current quarter at -428.5K shares, which represents about 3.69% of the company's float of 11.61M shares.

8. Robbins & Myers: Robbins & Myers,, together with its subsidiaries, supplies engineered equipment and systems for various applications in energy, industrial, chemical, and pharmaceutical markets worldwide. Net institutional sales in the current quarter at -1.2M shares, which represents about 3.02% of the company's float of 39.80M shares.

9. Briggs & Stratton: Designs, manufactures, markets, and services air cooled gasoline engines for outdoor power equipment worldwide. Net institutional sales in the current quarter at -4.4M shares, which represents about 9.02% of the company's float of 48.77M shares.

10. China Yuchai International (NYS: CYD) : China Yuchai International Limited, through its subsidiaries, manufactures and sells diesel and natural gas engines in China and internationally. Net institutional sales in the current quarter at -643.0K shares, which represents about 4.16% of the company's float of 15.44M shares.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


 

List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above. Institutional data sourced from Fidelity.

At the time this article was published Motley Fool newsletter services have recommended buying shares of Illinois Tool Works. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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