One of the biggest trends in foreign investing plays out right here at home.
It’s called reshoring.
An increasingly chaotic world has U.S. companies bringing back their supply chains. The pandemic, U.S.-China tensions, disputes about Taiwan and war have all seriously damaged supply chains. “Just in time” has become “just in doubt” delivery.
“Corporations saw their delivery times from China going from a month to three or four months,” says Harry Moser of the Reshoring Initiative.
Sometimes companies never even know when they’ll get the stuff they want. Foreign supply chains also amplify the downside of volatile freight costs, duty fees and tariffs.
There’s a good investing angle here.
Rising investment in U.S. factories will boost the stocks of homegrown businesses that support the trend, say Bank of America analysts. Own those that supply robotics, equipment, factories and warehouses. Regional banks will benefit too. Most of those are smaller companies, but that’s a plus. Small companies look particularly cheap right now.
Bank of America suggests dozens of names to clients. I offer 17 below, with help from that bank and Pedro Marcal, the lead portfolio manager of the Aquila Opportunity Growth Fund ATGAX.
First, Bank of America says the following factors support the case for a multiyear reshoring trend.
1. “Surging” mentions of reshoring on earnings calls tell us the trend is real. “It’s occurring, it’s been occurring,” said Huntington Bancshares HBAN CEO Steve Steinour in the bank’s July earnings call. Huntington has a big presence in manufacturing states including Ohio, Illinois, Indiana, Kentucky, Michigan, Pennsylvania and Wisconsin. “We’re getting some of that benefit here in the Midwest, and I suspect probably in the Southeast and Southwest as well. I think that’s going to continue.” The bank does equipment financing.
In its July call, the specialty chemicals company RPM International RPM said it is building up production to support onshoring in the pharmaceutical, food, technology and energy security sectors. United States Steel X now favors domestic iron ore mines to get an advantage over competitors.
2. Job listings tell us the trend is real. U.S. manufacturing job listings as a percentage of total job listings have been on the rise for the past year, says Bank of America. Most of the reshoring investment and job growth is in the South and the Midwest. Key reshoring states include Michigan, Texas, Tennessee, Arizona, North Carolina and South Carolina.
3. The CHIPS and Science Act of 2022 offers over $50 billion in grants to encourage semiconductor plant construction in the U.S. Also, tax incentives. Intel INTC, Texas Instruments TXN, Taiwan Semiconductor TSM, Samsung, Micron Technology MU, GlobalFoundries GFS and SkyWater Technology SKYT have announced plans to increase chip production in Texas, Arizona, Ohio New York and Idaho. The Inflation Reduction Act and the Infrastructure Investment and Jobs Act also support the construction of U.S. manufacturing plants.
4. The “social” element of environmental, social and governance (ESG) demands that companies know if they’re involved in human rights abuses abroad — such as child labor or forced employment camps. This is harder when suppliers are scattered abroad. Companies are also reshoring to reduce carbon emissions (see below).
5. For every $10 billion of manufacturing revenue moved back the U.S., capital spending here goes up $3.8 billion, says Bank of America. A third of this is for buildings and two-thirds is for equipment.
With wages going up a lot, companies will want to invest in automation. They’ll turn to Rockwell Automation ROK because it specializes in industrial automation equipment, one reason it’s a favored name at Marcal’s Aquila Opportunity Growth Fund. Rockwell gets over half its revenue from domestic sales, and it has the largest market share in this space, says Marcal. Rockwell’s Firstronic electronics manufacturing division is picking up business from companies that are reshoring operations, says Marcal. Bank of America also suggests Emerson Electric EMR and Honeywell HON as beneficiaries of industrial automation spending linked to reshoring.
To build and expand plants at home, U.S. companies will turn to Jacobs Solutions J, and this makes it a reshoring play, says Marcal. An engineering and design company, Jacobs gets high marks for its work in the pharmaceutical and semiconductor industries, two sectors where reshoring is a major trend, says Bank of America. It also has exposure to the aerospace, auto and energy sectors. In pharma, customers include Pfizer PFE and Spark Therapeutics (ONCE). In semiconductor reshoring, one of their big customers is Intel, notes Marcal.
Marcal also cites Steel Dynamics STLD, which provides steel used in factory construction. One customer, Nextracker, which makes equipment that helps solar panels track the sun, is actively reshoring. “Customers want protection from steel and logistics cost volatility, and logistics delays associated with shipping, containers and ports,” says Nextracker CEO Dan Shugar. “We are migrating to domestic production to stabilize pricing and achieve superior on-time delivery for our customers.” Shugar also cites the lower carbon footprint of Steel Dynamics relative to overseas manufacturers.
Lithium Americas LAC, which has Lithium mines in Nevada, will benefit as Ford F ramps up factories to make EV batteries in Kentucky and Tennessee, says Marcal.
In the past two years, there’s been over $100 billion in announced capital spending plans. This doesn’t include large projects recently announced by Samsung, Intel and Micron. Micron alone plans to spend $40 billion during 2022-2030, though that includes spending on research.
Bank of America cites Rockwell Automation, Emerson Electric, Eaton ETN, Fortive FTV, as equipment makers that will benefit from increased U.S. semiconductor capex spending, as well as PTC PTC and Ansys ANSS in design software. Marcal includes PDF Solutions PDFS, which offers analytics software that helps chip makers improve their efficiency. Chip equipment outlays are 70%-80% of the cost of a new semi fab, says Bank of America.
Reshoring will help regional banks in U.S. manufacturing states. Increased capex spending and employment growth will boost commercial and consumer banking. Bank of America cites KeyCorp KEY, Fifth Third FITB, Huntington, Synovus SNV, Comerica CMA and Cullen Frost CFR as possible beneficiaries.
Michael Brush is a columnist for MarketWatch. At the time of publication, he had no positions in any stocks mentioned in this column. Brush has suggested HBAN, INTC, TXN, MU, HON, PFE, F and KEY in his stock newsletter, Brush Up on Stocks. Follow him on Twitter @mbrushstocks.