A 'once-in-a-generation' factory construction boom won't bow to economic jitters. How investors can play it

Published Tue, Nov 14 20232:11 PM EST

Higher financing rates aren't derailing the ongoing reshoring phenomenon. U.S. companies continue to return operations back to home, with manufacturing construction that has been put in place tracking about 70% higher year over year, bifurcating from broader nonresidential construction, according to UBS. The reshoring announcements took off after the Covid-19 pandemic disrupted supply chains. While the rate of announcements has come down, new projects are still being started at two times the historical run rate, said UBS analyst Chris Snyder. "All these announcements are great and it's the leading indicator, but you don't order capital goods immediately," he said. Now, the window is opening on orders for the components that will go into the construction, he added. "Orders are going to start accelerating on top of the already record backlogs," he said. The new projects are being referred to as mega-projects, and they will involve companies from across sectors to provide construction equipment, electrical work and robotics, among others. "There is so much angst and concern about the economy," said Eli Horton, senior portfolio manager of TCW's active equity ETF investments. One of those exchange-traded funds is TCW Transform Supply Chain ETF (SUPP), a play on the reshoring theme. "[Yet] in just [the past] six months, we've added about $300 billion of orders for mega projects," he added. "That has all happened during a very high rate environment." SUPP mountain 2023-02-14 TCW Transform Supply Chain ETF since it's Feb. 14, 2023 launch The Federal Reserve started hiking interest rates last year to combat inflation. The central bank hasn't ruled out further rate increases, although the market is expecting the Fed to start cutting rates sometime next year. '3,000% increase' in reshoring mentions The increase in interest in reshoring can be seen in the surge in the use of the term by companies during earnings conference calls. "Mid-2020 to mid-2023, there's been roughly a 3,000% increase in the use of the term reshoring. This is a very high level priority," Horton said. Just this past earnings season, a number of companies mentioned the benefits of reshoring or onshoring, which mean the same thing, as well as near-shoring, which refers to moving manufacturing to a nearby country. For one, U.S. Steel said there is a "stark reversal" of the decades-long globalization now underway. "The United States is experiencing a once-in-a-generation onshoring boom," the company said during its Oct. 27 conference call. Here are some examples of other mentions during earnings calls. How to invest UBS' top pick has long been Eaton , which has not only been growing its earnings and revenue but its backlog of orders as well, Snyder said. The company makes electrical components for the automated machinery that goes into many of these new facilities. During its third-quarter earnings call in October, Eaton announced mega projects grew 25% between the third quarter and second quarter, and the second quarter was up 20% from the first quarter. Only about 20% of those projects have actually started, CEO Craig Arnold said. Of those, Eaton has won about $850 million of orders, with a win rate of approximately 40%. It is actively negotiating another $1 billion of electrical orders on a small subset of these announced mega projects, he said. ETN YTD mountain Eaton's year-to-date performance "These projects are solid. They're going to go forward and we think it's once again going to be really attractive growth tailwind for the company," Arnold said. Shares of Eaton are up nearly 45% year to date. UBS also likes Trane Technologies, which posted its strongest bookings in the company's history when it recently reported quarterly earnings, Snyder pointed out in a Nov. 1 note. He called the company "the smartest guy in the room" on heating, ventilation, and air conditioning (HVAC). "They do really, really well on these big, complex mega projects," Snyder said. "They are the leaders on technology and innovation." Trane Technologies' stock hit a 52-week high on Tuesday and is up more than 35% so far this year. Meanwhile, Horton's TCW Transform Supply Chain ETF focuses on manufacturing, automation and transportation . Its top holding is Waste Management, which Horton called a key partner for commercial and industrial disposal and collections. Another top holding is Martin Marietta Materials , which produces the aggregates used for construction projects. While the company recently said there has been weakness in residential, office and retail construction, the most important drivers for the company are manufacturing and industrial construction, as well as civil investment such as bridges and new roads. "We're seeing evidence already for that business that this theme is beginning to drive acceleration and fundamentals." Hortons said. "We're still very early days." Waste Management has gained just under 10% year to date, while Martin Marietta is up nearly 38%. 'Long-dated theme' While Horton is confident reshoring will be a strong, long-term theme, he admits there will be some bumps in the road as companies try to make the economics work with higher interest rates. That could result in some small delays in the projects, he said. However, it took decades to build a global supply chain and it is going to take at least that long to reshore portions of the supply chain, Horton said. "We're not done by 2030 and we're not done by 2040. This is a very long-dated theme," he said. "It is motivated by economic need and fiscal support. So while there will be various cycles in the economy, I think this is a theme that persists through those cycles." — CNBC's Michael Bloom and Nick Wells contributed reporting.