The United States' July purchasing managers' index (PMI) has retraced month-over-month for the first time in two years. The latest data shows that the general PMI receded to 52.3, down from 52.7, while the non-manufacturing PMI dipped to 47.00 from a previous level of 52.7.
Given the dip in PMI data, the zeitgeist could cause the stock market to price certain stocks unfavourably. Here are two stocks that I believe would be better to avoid until industrial output recovers.
Ford Motor Co
As a mega-cap automotive stock, Ford Motor Co (F, Financial) is one of the core stocks that is exposed to the United States' industrial production levels. Sure, the company has been a lucrative long-term play with its substantial market share and its pivot towards electric vehicles. However, the fact of the matter is that Ford is cyclical and is thus severely exposed to economic downturns. As such, managing the stock's weight in one's portfolio is essential.
Recently, the company reported its worst ever China sales report, which conveyed a 22% year-over-year decline in deliveries. Also, the Eurozone's car registrations (which includes all brands) slumped by 15.4%, suggesting consumer weakness in the region, which could affect Ford, considering its significant regional exposure.
From a valuation vantage point, Ford looks overvalued as its trading at 1.16 times its book value with a negative three-year compound annual growth rate in free cash flow. The GF Value chart also rates the stock as significantly overvalued.
Cleveland-Cliffs
As a producer of steel, Cleveland Cliffs' demand is directly correlated to industrial productivity.
The company released its second-quarter earnings report this week, and although it marched past its revenue expectation by $170 million, it missed out on its bottom-line target by 5 cents per share.
Falling commodity prices are a big concern for primary sector investors. Although energy and food prices remain resilient, metal prices will likely plummet alongside rising interest rates as core spending power could erode. Therefore, Cleveland-Cliffs' economies of scale could become obsolete, causing the company to lose pricing power.
Although certain metrics such as the GF Value indicate that the stock is undervalued, others such as as book value and the projected free cash flow imply that the market has already priced or overpriced the stock's value. Moreover, as things stand, the stock doesn't pay dividends, removing any total return prospects and centralizing price return.
Concluding thoughts
The stocks mentioned in this article are susceptible to the United States' production rates, but they are far from the only ones displaying a more dismal outlook as the PMI drops. Although they might be lucrative in different circumstances, I think the short-term case should be avoided until the core economic indicators re-align.
