Weekly Wisdom – February 28, 2024

By Hightower Great Lakes on February 28, 2024

Manufacturing Rebound  

Data over the last few months has shown that U.S. manufacturing has found a bottom and is now expanding – something we’ve been calling for over the past year. S&P Global released its latest U.S. manufacturing PMI on February 22, which not only exceeded analyst expectations but also flashed expansion.

The figure came in at 51.5 versus expectations of 50.7 (as a reminder, this is a diffusion index and anything over 50 indicates growth).[1] This figure marks the highest U.S. manufacturing PMI since September 2022.

The new orders subindex of PMI, a leading indicator, also showed promise. New orders reached 53.5, the highest-level dating back to May 2022.[2] These figures bode well for hopes that February’s ISM manufacturing report, released March 1, will finally break through 50.

The recovery of U.S. manufacturing not only directly helps the manufacturing companies, but also the economy as a whole. Every manufacturing job in the U.S. creates 2.79 added jobs in other sectors, and more jobs in turn means more money in consumer pockets. Industries that should see benefits from elevated manufacturing activity include aviation, electric grid and medical technology.

The aviation industry should see a benefit from increased air cargo as more goods are manufactured, as well as increased business travel due to the elevated PMI signaling a robust economy. We are seeing an improvement in sentiment regarding business travel with a Global Business Travel Associates poll showing that 59% of travel buyers expect business travel volume to increase in 2024 versus 2023.[3] 

PMI expansion can also positively impact electric grid companies due to increased energy consumption, further justifying the spend for grid improvement and optimization. Quanta Services (PWR) stated in its earnings release that, “utilities across the United States are experiencing and forecasting meaningful increases in power demand for the first time in many years.”[4] This company has a backlog over $30 billion as proof.

The story is similar for medical device companies. Due to the stronger economy and increased demand, hospitals will have more incentive to deploy capex towards new devices. It is expected that hospital capex will increase 2.5% y/y in 2024 and could last for several years.

Chart 1: S&P Global Flash U.S. PMI, CPI Since 2018[5]

Berkshire Hathaway: Earnings Takeaways

Berkshire Hathaway (BRK.B) posted an impressive operating income figure of nearly $8.5 billion, which came in more than 7% above Wall Street’s expectations.

We pay attention to this company not only because it is run by the world’s most successful portfolio manager but also because of the company’s diverse mix of businesses – from insurance, to railroads, energy, beverages and candy. And let’s not forget Dairy Queen! [6]

The quarterly results highlighted the company’s elevated cash level, which is currently sitting at an all-time high of $167.6 billion. Buffet explained the elevated cash levels by saying, “there remain only a handful of companies in this country capable of truly moving the needle at Berkshire, and they have been endlessly picked over by us and by others.”[7]

The company’s insurance underwriting business drove the income and revenue beats, which benefited from elevated interest rates. The operating earnings for this business were up over 400% y/y. Although Berkshire’s utilities and energy segments posted negative annual results, the energy sector still represents nearly 10% of the company’s portfolio.

Warren Buffet has been building a substantial stake in Occidental Petroleum (OXY) over the past few years and now owns over 28% of the company. But the Oracle of Omaha explained in this quarter’s report that he has no interest in managing or acquiring the entire company.

Information technology is still the largest sector presence within Berkshire Hathaway’s portfolio, representing 51%. This information technology stake is led by Apple (AAPL), which makes up around 45% of the entire portfolio.[8]

Consumer Electronic Green-shoots

The early years of the pandemic presented a boom in consumer electronics, fueled by work-from-home trends and the need to stay connected. However, when that extraordinary COVID demand ran its course, there was a slowdown in consumer electronics spending.

Retail sales for electronics and appliances are still down -5.8% y/y, as of January.[9] Despite this slowdown over the past couple of years, commentary from companies indicates that demand is beginning to normalize.

Recent earnings reports from Walmart (WMT) and 3M (MMM) suggest signs of stabilization in the market. Walmart reported sturdy growth in appliance and TV sales. TV sales were up in the high single digits. The big box retailer also reported that it is acquiring Vizio for $2.3 billion, a move that goes further than just TV sales, as Walmart will be able to leverage Vizio’s TV network to sell ads.[10]

3M also had positive comments on the sub-sector, as its electronics business saw signs of end-market stabilization.[11] Typically, 3M is not the first company that comes to mind in the consumer electronics sector, but it plays a key role in the supply chain as a manufacturer of critical components, technical expertise and protective solutions for electronic shipments. 

We would be remiss if we didn’t include behemoths like Samsung (SSNLF) and Apple (AAPL) when discussing a consumer electronics upcycle. Both companies stand to benefit well from a new cycle. Samsung recently unveiled the Galaxy Ring, a health-tracking wearable that monitors heart rate, sleep patterns and readiness.

It also hints at future functionalities like contactless payments and even blood pressure monitoring.[12] Consumers have shown strong interest in consumer products that have health-tracking features.

Apple, on the other hand, is rumored to be releasing a slew of new devices this year, including iPhones, iPads, Apple Watches, MacBooks and the latest product: the Vision Pro virtual reality goggles. The Vision Pro is Apple’s first spatial computer that blends digital content with the physical world.

This new product has already gained impressive demand, as Apple has sold 200,000 units since preorders opened.[13] It appears to be timing this consumer cycle strategically with new products.

As companies continue to grow AI spending, this will fuel a product cycle that is filled with generative AI products for consumers. We are still in the early innings of this generative AI transformation that is expected to become a $1.3 trillion industry by 2032 and grow at a 42% CAGR over the next 10 years.[14]

Click here to read last week’s Weekly Wisdom (2/24).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: S&P Global. As of February 22, 2024.

[2] Source: FX Street. As of February 22, 2024.

[3] Source: Business Travel News. As of January 31, 2024.

[4] Source: Quanta Services. As of February 22, 2024.

[5] Source: S&P Global. As of February 22, 2024.

[6] Source: Berkshirehathaway. As of October 21, 1997. 

[7] Source: CNBC. As of February 24, 2024.

[8] Source: US News. As of February 22, 2024.

[9] Source: Census.gov. As of February 15, 2024.

[10] Source: Cnbc.com. As of February 20, 2024.

[11] Source: 3M.com. As of January 23, 2024.

[12] Source: Cnbc.com. As of February 26, 2024.

[13] Source: Bloomberg.com. As of February 2, 2024.

[14] Source: Bloomberg.com. As of June 1, 2023.